Calculate the present value of unlevered cash flows for the first 5 years
Calculate the present value of levered cash flows for the last 5 years
Calculate the present value of interest tax shields for the first 5
Calculate the present values of interest tax shields for the beyond 5 years
Meg has suggested the potential LBO to her partners, Ben and Brenton. Ben and Brenton have asked Meg to provide projections of the cash flows for the company. Meg has provide the following estimates (in millions): Please review info and complete requirements for the Final Case Analysis: The Leveraged Buyout of Cheek Products, Inc. Cheek Products, inc. (CPI), was founded 53 years ago by Joe Cheek and originally bold snack foods such as potato chips and pretzels. Through acquisitions, the company has grown into a conglomerate with major divisions in the snack food, home security systems, cosmetics, and plastics industries. Additionally, the company has several smaller divisions. In recent years, the company has been underperforming. but the company's management doesn't seem to be aggressively pursuing opportunities to improve operations (or the 'stock price). Meg Whalen is a financial analyst specializing in identifying potential buyout targets. She believes that two major changes are needed at CPI. First, she thinks that the company would be better off if it sold several divisions and concentrated on its core competencies in snack foods and home security systems. Second, the company is financed entirely with equity. Because the cash flows of the company are relatively steady, Meg thinks the company's debt-equity ratio should be 25 percent. She believes these changes would significantly enhance shareholder wealth, but she also believes that the existing board and company management are unlikely to take the necessary actions, As a result, Meg thinks the company is a good candidate for a leveraged buyout. A leveraged buyout (LBO) is the acquisition by a small group of ecuily investors of a public or private company. Generally, an LBO is financed primanly with debt. The new shareholders service the heavy interest and principal payments with cash from operations andlor asset sales. Sharehoiders generally hope to reverse the LBO within three to seven years by way of a public offering or sale of the company to another firm. A buyout is therefore likely to be successful only if the firm generates enough cash to service the debt in the early years and if the company is attractive to other buyers a few years down the road. Meg has suggested the potential LBO to her partners, Ben Feller and Brenton Flynn. Ben and Brenton have asked Meg to provide projections of the cash flows for the company. Meg has provided the following estimates (in millions): (See Final Case Sheet above) At the end of five years, Meg estimates that the growth rate in cash flows will be 3.5 percent por year. The capital expenditures are for new projects and the replacement of equipment that wears out. Additionally, the company would realize cash flow from the sale of several divisions. Even though the company will sell these divisions, owerall sales should increase because of a more concentrated effort on the remaining divisions. Aher plowing through the company's finencials and various pro forma scenarios, Ben and Brenton feel that, in five years, they will be able to sell the company to another party or take it public again. They also are aware that they will have to borrow a considerable amount of the purchase price. The interest payments on the debt for each of the next five yoars if the LBO is undertaken wit be (in miltions): The company currently has a required return on assets of 14 percent. Because of the high debt level, the debt will carry a yield to maturity of 12.5 percent for the next five years. When the debt is refinanced in five years, they believe the new yield to maturity will be 8 percent. CPicurrently has 215 million shares of stock outstanding that sel for $29 per share. The corporate tax rate is 21 percant. If Meg. Ben, and Brenton decide to undertake the LBO, what is the most they should oflor per share? Meg has suggested the potential LBO to her partners, Ben and Brenton. Ben and Brenton have asked Meg to provide projections of the cash flows for the company. Meg has provide the following estimates (in millions): Please review info and complete requirements for the Final Case Analysis: The Leveraged Buyout of Cheek Products, Inc. Cheek Products, inc. (CPI), was founded 53 years ago by Joe Cheek and originally bold snack foods such as potato chips and pretzels. Through acquisitions, the company has grown into a conglomerate with major divisions in the snack food, home security systems, cosmetics, and plastics industries. Additionally, the company has several smaller divisions. In recent years, the company has been underperforming. but the company's management doesn't seem to be aggressively pursuing opportunities to improve operations (or the 'stock price). Meg Whalen is a financial analyst specializing in identifying potential buyout targets. She believes that two major changes are needed at CPI. First, she thinks that the company would be better off if it sold several divisions and concentrated on its core competencies in snack foods and home security systems. Second, the company is financed entirely with equity. Because the cash flows of the company are relatively steady, Meg thinks the company's debt-equity ratio should be 25 percent. She believes these changes would significantly enhance shareholder wealth, but she also believes that the existing board and company management are unlikely to take the necessary actions, As a result, Meg thinks the company is a good candidate for a leveraged buyout. A leveraged buyout (LBO) is the acquisition by a small group of ecuily investors of a public or private company. Generally, an LBO is financed primanly with debt. The new shareholders service the heavy interest and principal payments with cash from operations andlor asset sales. Sharehoiders generally hope to reverse the LBO within three to seven years by way of a public offering or sale of the company to another firm. A buyout is therefore likely to be successful only if the firm generates enough cash to service the debt in the early years and if the company is attractive to other buyers a few years down the road. Meg has suggested the potential LBO to her partners, Ben Feller and Brenton Flynn. Ben and Brenton have asked Meg to provide projections of the cash flows for the company. Meg has provided the following estimates (in millions): (See Final Case Sheet above) At the end of five years, Meg estimates that the growth rate in cash flows will be 3.5 percent por year. The capital expenditures are for new projects and the replacement of equipment that wears out. Additionally, the company would realize cash flow from the sale of several divisions. Even though the company will sell these divisions, owerall sales should increase because of a more concentrated effort on the remaining divisions. Aher plowing through the company's finencials and various pro forma scenarios, Ben and Brenton feel that, in five years, they will be able to sell the company to another party or take it public again. They also are aware that they will have to borrow a considerable amount of the purchase price. The interest payments on the debt for each of the next five yoars if the LBO is undertaken wit be (in miltions): The company currently has a required return on assets of 14 percent. Because of the high debt level, the debt will carry a yield to maturity of 12.5 percent for the next five years. When the debt is refinanced in five years, they believe the new yield to maturity will be 8 percent. CPicurrently has 215 million shares of stock outstanding that sel for $29 per share. The corporate tax rate is 21 percant. If Meg. Ben, and Brenton decide to undertake the LBO, what is the most they should oflor per share
