BACKGROUND The Big Consumer Product Company acquires 100% of Green Grass Diapers for $ 540000 on 12/31/x0. Green Diapers company is diaper manufacturer that specializes in the manufacture of organic diapers. It started off as a cloth diaper service company. After some R & D, they launched a reasonably successful brand of ecologically friendly diapers with the "Green Grass" trademark. Assume that Big Consumer Product Company is a publicly traded company. Green Grass is a debt-free company. Green Grass holds a patent for its ecologically friendly diaper technology. The management of Big Consumer Product Company provides you with the forecast shown below. The Base year is the current year with historical data. Details of buyer specific synergies are also provided. You have previously computed the weighted average cost of capital to be 15% for Green Grass Company which is consistent with the management's estimate. Your analysis suggests that market participant revenue and cost synergies are 4 % of revenues and of COGS and Operating expenses respectively. REQUIRED: 4 6 4% Each TAB has a question that you need to answer. Clearly state all assumptions and show your workings. You need to post on the discussion forum if you are confused or are not sure or you find an ambiguity. Comments & Year Assumptions Base Year 1 2 3 Growth Rate Steady from Year 7 12% 10% 10% Revenues 396300 443856 488241.6 537066 Buyer Specific Revenue Synergies 5% of Revenue 22193 24412 26853 Total Revenues 466049 512654 563919 COGS and Other Op. Expenses 85% of Revenues 336855 396141 435756 479331 Buyer Specific Cost Synergies 5% of Costs 19807 21788 23967 Cost with Synergies 376334 413968 455365 EBIT 19.25% from Year 1 59445 89714 98686 108554 Tax Rate (35%) 20806 31400 34540 37994 Debt Free NI 58314 64146 70560 Depreciation 14000 16000 15500 15000 Capital Expenditure 14000 15000 15000 15000 Investment in working capital 5000 6000 5600 6160 FCFF (Net Cash Flow) 53314 59046 64400 7% 574660 28733 603393 512884 25644 487240 116153 40654 75500 14500 15000 5 6% 609140 30457 639597 543657 27183 516475 123122 43093 80030 14000 14000 4350 75679 633506 31675 665181 565404 28270 537134 128047 44817 83231 13500 14000 3074 79657 7 4% 658846 32942 691788 588020 29401 558619 133169 46609 86560 13000 13000 3197 83363 757844 351352 4743 70256 49716 47879 45409 43077 40349 36930 WACC Acquisition Price IRR 15% 614712 $540,000 16.43% ($540,000) 53,314 59,046 64,400 70,256 75,679 837,501 Question: The Company is assessed to have a customer retention rate of 50% for its branded products. Also, since the market for ecologically friendly diapers is heating up, management expects new product launches by competitors to wipe out its existing customer base after 4 years. Also, typically customers stay on for a period of 4 years after they first start buying the comoany's products. EBIT margin as estimated (17.6% of sales revenue) included marketing costs to new customers equal to 2.40%. The valuation appraiser uses a discount rate of WACC plus a premium of 5% to value this asset. Your estimate of Contributory Asset Charges on patent, assembled workforce, trademark, PPE and net working capital is 9.35% of revenue. Estimate the value of the customer relationship asset. Clearly show the computation of the retention rate using a simple arithmentic average process. BACKGROUND The Big Consumer Product Company acquires 100% of Green Grass Diapers for $ 540000 on 12/31/x0. Green Diapers company is diaper manufacturer that specializes in the manufacture of organic diapers. It started off as a cloth diaper service company. After some R & D, they launched a reasonably successful brand of ecologically friendly diapers with the "Green Grass" trademark. Assume that Big Consumer Product Company is a publicly traded company. Green Grass is a debt-free company. Green Grass holds a patent for its ecologically friendly diaper technology. The management of Big Consumer Product Company provides you with the forecast shown below. The Base year is the current year with historical data. Details of buyer specific synergies are also provided. You have previously computed the weighted average cost of capital to be 15% for Green Grass Company which is consistent with the management's estimate. Your analysis suggests that market participant revenue and cost synergies are 4 % of revenues and of COGS and Operating expenses respectively. REQUIRED: 4 6 4% Each TAB has a question that you need to answer. Clearly state all assumptions and show your workings. You need to post on the discussion forum if you are confused or are not sure or you find an ambiguity. Comments & Year Assumptions Base Year 1 2 3 Growth Rate Steady from Year 7 12% 10% 10% Revenues 396300 443856 488241.6 537066 Buyer Specific Revenue Synergies 5% of Revenue 22193 24412 26853 Total Revenues 466049 512654 563919 COGS and Other Op. Expenses 85% of Revenues 336855 396141 435756 479331 Buyer Specific Cost Synergies 5% of Costs 19807 21788 23967 Cost with Synergies 376334 413968 455365 EBIT 19.25% from Year 1 59445 89714 98686 108554 Tax Rate (35%) 20806 31400 34540 37994 Debt Free NI 58314 64146 70560 Depreciation 14000 16000 15500 15000 Capital Expenditure 14000 15000 15000 15000 Investment in working capital 5000 6000 5600 6160 FCFF (Net Cash Flow) 53314 59046 64400 7% 574660 28733 603393 512884 25644 487240 116153 40654 75500 14500 15000 5 6% 609140 30457 639597 543657 27183 516475 123122 43093 80030 14000 14000 4350 75679 633506 31675 665181 565404 28270 537134 128047 44817 83231 13500 14000 3074 79657 7 4% 658846 32942 691788 588020 29401 558619 133169 46609 86560 13000 13000 3197 83363 757844 351352 4743 70256 49716 47879 45409 43077 40349 36930 WACC Acquisition Price IRR 15% 614712 $540,000 16.43% ($540,000) 53,314 59,046 64,400 70,256 75,679 837,501 Question: The Company is assessed to have a customer retention rate of 50% for its branded products. Also, since the market for ecologically friendly diapers is heating up, management expects new product launches by competitors to wipe out its existing customer base after 4 years. Also, typically customers stay on for a period of 4 years after they first start buying the comoany's products. EBIT margin as estimated (17.6% of sales revenue) included marketing costs to new customers equal to 2.40%. The valuation appraiser uses a discount rate of WACC plus a premium of 5% to value this asset. Your estimate of Contributory Asset Charges on patent, assembled workforce, trademark, PPE and net working capital is 9.35% of revenue. Estimate the value of the customer relationship asset. Clearly show the computation of the retention rate using a simple arithmentic average process