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Chapter 9: Homework. Total 40 points. Question 1. Below is forecasting information for AZN Inc. 2016 2017 2018 Projected EBIT $350 $375 $395 Earnings after Tax $210 $225 $237 Free Cash Flow $138 $145 $165 Assume WACC = 9%; Expected growth rate in FCFs after 2018 into the indefinite future is 8%; Warranted MV firm/FCF in 2018 = 18; Warranted P/E in 2018 = 21. a) What is an appropriate estimate of the firm's terminal value as of the end of 2018, using the perpetual-growth equation as your estimate? (1 point) b) What is an appropriate estimate of the firm's terminal value of equity as of the end of 2018, using the warranted P/E ratio? (1 point) c) What is an appropriate estimate of the firm's terminal value of equity as of the end of 2018, using a warranted multiple of free cash flow as your estimate? (1 point) d) What is the value of AZN at the beginning of 2016, using the terminal value from a). (1 point) Question 2. STU Corporation has $3 million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5, and earnings per share of comparable firm 2 is $2. Comparable firm 1's stock is trading for $50, and comparable firm 2's stock is trading for $28. What is the estimated stock price of STU using the method of comparables? (Use average multiples of the comparable firms when doing the calculations.) (4 points) Question 3. Tutter Corporation is being valued using discounted cash flow methodology with terminal value calculated as a growing perpetuity. Not including the terminal value, the present value of projected free cash flows for years 1 through 5 is $200 million (total). In year 5, projections show free cash flow of $60 million. What is the estimated fair market value of Tutter Corporation? Assume a WACC of 10% and a growth rate of 2%. (4 points) Question 4. Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated value of the enhancements from the merger have to be? (4 points) Question 5. Consider the following premerger information about a bidding firm (Buyitall Inc.) and a target firm (Tarjay Corp.). Assume that neither firm has any debt outstanding. Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600. What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash? (4 points) Question 6. Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $40 per share. The number of outstanding shares at the time of the announcement was 80 million. The book value of liabilities on the balance sheet of Slick Co. was $3.8 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil? (4 points) Question 7: In August 2008, Apburn Inc. entered into an agreement to purchase all of the outstanding shares of Ballard Corp. for $80 per share. Immediately prior to the Apburn Inc.'s bid, the shares of Ballard Corp. traded at $40 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of interest-bearing liabilities on the balance sheet of Ballard Corp. was $1.30 billion. What value did Apburn Inc. place on the control of Ballard Corp.? (4 points) Question 8. In March of 2016, ABC Corp. considered an acquisition of XYZ, Inc., a privately held educational software firm. As a first step in deciding what price to bid for XYZ, ABC's CFO, Ryan Lewis, has prepared a five-year financial projection for the company assuming the acquisition takes place. The WACC of the acquiring firm (ABC) is 8.0 percent, XYZ's WACC is 12 percent, and the average of the two companies' WACCs, weighted by sales, is 10 percent. a) What is XYZ's projected free cash flow for 2016->2020? (2 points) b) Estimate the present value of XYZ's free cash flow for the years 2016 to 2020 (2 points) c) Estimate XYZ's value at the end of 2015 assuming it is worth the book value of its assets at the end of 2020. What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) d) Estimate XYZ's value at the end of 2015 assuming that at year-end 2020 the company's equity is worth 15 times earnings after tax and its debt is worth book value. What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) e) Estimate XYZ's value at the end of 2015 assuming that in the years after 2020 the company's free cash flow grows 6 percent per year in perpetuity. What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) f) Estimate XYZ's value at the end of 2015 assuming that in the years after 2020 the company's free cash flow will equal the FCF at the end of 2020 and stay in perpetuity (no-growth perpetuity). What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) Chapter 9: Homework. Total 40 points. Question 1. Below is forecasting information for AZN Inc. 2016 2017 2018 Projected EBIT $350 $375 $395 Earnings after Tax $210 $225 $237 Free Cash Flow $138 $145 $165 Assume WACC = 9%; Expected growth rate in FCFs after 2018 into the indefinite future is 8%; Warranted MV firm/FCF in 2018 = 18; Warranted P/E in 2018 = 21. a) What is an appropriate estimate of the firm's terminal value as of the end of 2018, using the perpetual-growth equation as your estimate? (1 point) TV 2018 = FCF 2019/(WACC-g) = 165 x 1.08 /(0.09-0.08) = 17,820 b) What is an appropriate estimate of the firm's terminal value of equity as of the end of 2018, using the warranted P/E ratio? (1 point) TV of equity 2018 = P/E x E2018 = 21 x 237 = 4,977 c) What is an appropriate estimate of the firm's terminal value of equity as of the end of 2018, using a warranted multiple of free cash flow as your estimate? (1 point) TV of equity 2018 = MV/FCF x FCF2018 = 18 x 165 = 2,970 d) What is the value of AZN at the beginning of 2016, using the terminal value from a). (1 point) CFo = 0; C01 = 138; C02 = 145; C03= 165+17,820 = 17,985; I =9, NPV = 14,136.4 Question 2. STU Corporation has $3 million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5, and earnings per share of comparable firm 2 is $2. Comparable firm 1's stock is trading for $50, and comparable firm 2's stock is trading for $28. What is the estimated stock price of STU using the method of comparables? (Use average multiples of the comparable firms when doing the calculations.) (4 points) Comp. 1 P/E = 50/5= 10, Comp. 2 P/E = 28/2 = 14, Avg. P/E = (10+14)/2=12 STU = 12 $3.00 (EPS) = $36.00 Question 3. Tutter Corporation is being valued using discounted cash flow methodology with terminal value calculated as a growing perpetuity. Not including the terminal value, the present value of projected free cash flows for years 1 through 5 is $200 million (total). In year 5, projections show free cash flow of $60 million. What is the estimated fair market value of Tutter Corporation? Assume a WACC of 10% and a growth rate of 2%. (4 points) TV at the end of year 5 = FCF at the end of year 6/(WACC-g) = 60(1.02)/(.1-.02)=765 Fair market value = 200 + 765/1.15= 200+475 =675 Question 4. Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated value of the enhancements from the merger have to be? (4 points) Minimum economic value in present value terms = $860 million - $710 million = $150 million Question 5. Consider the following premerger information about a bidding firm (Buyitall Inc.) and a target firm (Tarjay Corp.). Assume that neither firm has any debt outstanding. Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600. What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash? (4 points) The NPV of the merger is the market value of the target firm, plus the value of the enhancements, minus the acquisition costs: NPV = 1,100 ($26) + $2,600 - 1,100($28) = $400. Question 6. Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $40 per share. The number of outstanding shares at the time of the announcement was 80 million. The book value of liabilities on the balance sheet of Slick Co. was $3.8 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil? (4 points) The value of the bid to Ginormous's shareholders is the value of the assets acquired in the merger. This would include the value of the equity acquired and the liabilities that accompany the equity. Therefore, the cost of the acquisition was ($40 x 80 million shares) + $3.8 billion = 6.38 billion. Question 7: In August 2008, Apburn Inc. entered into an agreement to purchase all of the outstanding shares of Ballard Corp. for $80 per share. Immediately prior to the Apburn Inc.'s bid, the shares of Ballard Corp. traded at $40 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of interest-bearing liabilities on the balance sheet of Ballard Corp. was $1.30 billion. What value did Apburn Inc. place on the control of Ballard Corp.? (4 points) (80-40) x 82 million = 3,280 million or $3.28 billion Question 8. In March of 2016, ABC Corp. considered an acquisition of XYZ, Inc., a privately held educational software firm. As a first step in deciding what price to bid for XYZ, ABC's CFO, Ryan Lewis, has prepared a five-year financial projection for the company assuming the acquisition takes place. The WACC of the acquiring firm (ABC) is 8.0 percent, XYZ's WACC is 12 percent, and the average of the two companies' WACCs, weighted by sales, is 10 percent. a) What is XYZ's projected free cash flow for 2016->2020? (2 points) b) Estimate the present value of XYZ's free cash flow for the years 2016 to 2020 (2 points) $1,241.0 PV@ 12% {FCF, 2015-2019} = 2 c) Estimate XYZ's value at the end of 2015 assuming it is worth the book value of its assets at the end of 2020. What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) d) Estimate XYZ's value at the end of 2015 assuming that at year-end 2020 the company's equity is worth 15 times earnings after tax and its debt is worth book value. What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) Estimated value of equity $ 2 ,754.53 d. Estim XYZ's valueat thee o 2 5 ass ingthat at ye nd 2020 theco pany's e ate nd f 01 um ar-e m quity isworth 15 Value of equity in 2020 9,502.50 Value of debt in 2020 1,359.00 Value of firm in 2020 10,861.50 Present value of firm in 2020 at 12% 6,163.11 Estimated firm value $ 7 ,404.13 Base on your ans r above what isthem d we , axim acquisitio price um n ? Estimated firm value 7,404.13 Existing interest-bearing debt 2,080.00 Estimated value of equity $ 5 ,324.13 e) Estimate XYZ's value at the end of 2015 assuming that in the years after 2020 the company's free cash flow grows 6 percent per year in perpetuity. What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) f) Estimate XYZ's value at the end of 2015 assuming that in the years after 2020 the company's free cash flow will equal the FCF at the end of 2020 and stay in perpetuity (no-growth perpetuity). What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) Chapter 9: Homework. Total 40 points. Question 1. Below is forecasting information for AZN Inc. 2016 2017 2018 Projected EBIT $350 $375 $395 Earnings after Tax $210 $225 $237 Free Cash Flow $138 $145 $165 Assume WACC = 9%; Expected growth rate in FCFs after 2018 into the indefinite future is 8%; Warranted MV firm/FCF in 2018 = 18; Warranted P/E in 2018 = 21. a) What is an appropriate estimate of the firm's terminal value as of the end of 2018, using the perpetual-growth equation as your estimate? (1 point) TV 2018 = FCF 2019/(WACC-g) = 165 x 1.08 /(0.09-0.08) = 17,820 b) What is an appropriate estimate of the firm's terminal value of equity as of the end of 2018, using the warranted P/E ratio? (1 point) TV of equity 2018 = P/E x E2018 = 21 x 237 = 4,977 c) What is an appropriate estimate of the firm's terminal value of equity as of the end of 2018, using a warranted multiple of free cash flow as your estimate? (1 point) TV of equity 2018 = MV/FCF x FCF2018 = 18 x 165 = 2,970 d) What is the value of AZN at the beginning of 2016, using the terminal value from a). (1 point) CFo = 0; C01 = 138; C02 = 145; C03= 165+17,820 = 17,985; I =9, NPV = 14,136.4 Question 2. STU Corporation has $3 million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5, and earnings per share of comparable firm 2 is $2. Comparable firm 1's stock is trading for $50, and comparable firm 2's stock is trading for $28. What is the estimated stock price of STU using the method of comparables? (Use average multiples of the comparable firms when doing the calculations.) (4 points) Comp. 1 P/E = 50/5= 10, Comp. 2 P/E = 28/2 = 14, Avg. P/E = (10+14)/2=12 STU = 12 $3.00 (EPS) = $36.00 Question 3. Tutter Corporation is being valued using discounted cash flow methodology with terminal value calculated as a growing perpetuity. Not including the terminal value, the present value of projected free cash flows for years 1 through 5 is $200 million (total). In year 5, projections show free cash flow of $60 million. What is the estimated fair market value of Tutter Corporation? Assume a WACC of 10% and a growth rate of 2%. (4 points) TV at the end of year 5 = FCF at the end of year 6/(WACC-g) = 60(1.02)/(.1-.02)=765 Fair market value = 200 + 765/1.15= 200+475 =675 Question 4. Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated value of the enhancements from the merger have to be? (4 points) Minimum economic value in present value terms = $860 million - $710 million = $150 million Question 5. Consider the following premerger information about a bidding firm (Buyitall Inc.) and a target firm (Tarjay Corp.). Assume that neither firm has any debt outstanding. Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600. What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash? (4 points) The NPV of the merger is the market value of the target firm, plus the value of the enhancements, minus the acquisition costs: NPV = 1,100 ($26) + $2,600 - 1,100($28) = $400. Question 6. Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $40 per share. The number of outstanding shares at the time of the announcement was 80 million. The book value of liabilities on the balance sheet of Slick Co. was $3.8 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil? (4 points) The value of the bid to Ginormous's shareholders is the value of the assets acquired in the merger. This would include the value of the equity acquired and the liabilities that accompany the equity. Therefore, the cost of the acquisition was ($40 x 80 million shares) + $3.8 billion = 6.38 billion. Question 7: In August 2008, Apburn Inc. entered into an agreement to purchase all of the outstanding shares of Ballard Corp. for $80 per share. Immediately prior to the Apburn Inc.'s bid, the shares of Ballard Corp. traded at $40 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of interest-bearing liabilities on the balance sheet of Ballard Corp. was $1.30 billion. What value did Apburn Inc. place on the control of Ballard Corp.? (4 points) (80-40) x 82 million = 3,280 million or $3.28 billion Question 8. In March of 2016, ABC Corp. considered an acquisition of XYZ, Inc., a privately held educational software firm. As a first step in deciding what price to bid for XYZ, ABC's CFO, Ryan Lewis, has prepared a five-year financial projection for the company assuming the acquisition takes place. The WACC of the acquiring firm (ABC) is 8.0 percent, XYZ's WACC is 12 percent, and the average of the two companies' WACCs, weighted by sales, is 10 percent. a) What is XYZ's projected free cash flow for 2016->2020? (2 points) b) Estimate the present value of XYZ's free cash flow for the years 2016 to 2020 (2 points) $1,241.0 PV@ 12% {FCF, 2015-2019} = 2 c) Estimate XYZ's value at the end of 2015 assuming it is worth the book value of its assets at the end of 2020. What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) d) Estimate XYZ's value at the end of 2015 assuming that at year-end 2020 the company's equity is worth 15 times earnings after tax and its debt is worth book value. What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) Estimated value of equity $ 2 ,754.53 d. Estim XYZ's valueat thee o 2 5 ass ingthat at ye nd 2020 theco pany's e ate nd f 01 um ar-e m quity isworth 15 Value of equity in 2020 9,502.50 Value of debt in 2020 1,359.00 Value of firm in 2020 10,861.50 Present value of firm in 2020 at 12% 6,163.11 Estimated firm value $ 7 ,404.13 Base on your ans r above what isthem d we , axim acquisitio price um n ? Estimated firm value 7,404.13 Existing interest-bearing debt 2,080.00 Estimated value of equity $ 5 ,324.13 e) Estimate XYZ's value at the end of 2015 assuming that in the years after 2020 the company's free cash flow grows 6 percent per year in perpetuity. What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points) f) Estimate XYZ's value at the end of 2015 assuming that in the years after 2020 the company's free cash flow will equal the FCF at the end of 2020 and stay in perpetuity (no-growth perpetuity). What is the maximum acquisition price ABC Inc. should pay to acquire XYZ's equity? (2 points)