c. Chapter 9 Problem 15 In early 2018, Integrated Communications, Ltd. was interested in acquiring Fractal Antenna Systems, Inc., a privately held company producing compact antennae. As a first step in deciding what price to bid for Fractal, Integrated's finance department has prepared a five-year financial projection for the company assuming an acquisition. Use this projection and Fractal's 2017 actual financial figures to answer the questions below. a. Estimate Fractal's free cash flow from 2018 through 2022. b. Estimate the present value of Fractal's free cash flow for the years 2018 to 2022. Integrated's WACC is 8.0 percent. Fractal's WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is Estimate Fractal's firm value at the end of 2017 under each of the following terminal value scenarios: i. Projected book value of assets at the end of 2022 ii. Perpetual growth in free cash flow at 4% per year after 2022 iii. Equity is worth 15 times after-tax earnings and debt is worth book value d. Assuming Fractal has 60 million shares outstanding, what is the maximum price per share Integrated should pay to acquire Fractal's equity in each of the three scenarios? Which of the three estimated maximum acquisition prices in question (i) above do you think is least reliable? FRACTAL ANTENNA SYSTEMS INC. INCOME STATEMENT ($ millions) Actual Forecast 2017 2018 2019 2020 2021 2022 Net sales $1,996 $2,267 $2,508 $2,827 $3,138 $3,571 Cost of sales 644 742 830 959 1,087 1,241 Gross income 1,352 1,525 1,678 1,868 2,051 2,330 Depreciation 492 785 1,061 1,301 1,009 917 Interest expense 171 178 191 175 142 110 Operating expenses 212 239 306 334 374 Net income before tax 477 323 156 86 566 929 Provision for taxes 186 126 61 34 221 363 Net income after tax $291 $197 $95 $52 $345 $566 e. 270 DI Cash and securities Accounts receivable Inventory Other current assets Total current assets Gross property and equipment Accumulated depreciation Net property and equipment Goodwill Total assets Accounts payable Short-term debt Current portion long-term debt Accrued expenses Total current liabilities Long-term debt Deferred taxes Shareholders' equity Total liabilities and equity BALANCE SHEET ($ millions) $358 $413 $462 208 236 267 399 463 541 156 122 142 1,121 1,234 1,412 4,180 5,149 6,410 868 1,654 2,714 3,312 3,495 3,696 1,069 1,069 1,069 5,502 5,798 6,177 104 77 91 335 482 842 41 140 165 86 97 120 566 796 1,218 1,694 1,554 1,389 335 344 370 2,907 3,104 3,200 $5,502 $5,798 $6,177 $545 309 629 167 1,650 7,449 4,015 3,434 1,069 6,153 110 814 200 134 1,258 1,189 454 3,252 $6,153 $618 354 739 212 1,923 8,200 5,024 3,176 1,069 6,168 117 585 223 174 1,099 966 505 3,598 $6,168 $704 405 864 206 2,179 9,016 5,941 3,075 1,069 6,323 135 393 267 168 963 699 496 4,165 $6,323