CASE Mergers and Acquisition

Carlson Airlines Debra Simpson, the CFO of Carlson Airlines, was considering the acquisition of Beta Transport Supply Company. The asking price was $100 million. Carlson Airlines was in a 30 percent tax bracket. The purchase was to be for cash and Debra intended to use capital budgeting procedures in the analysis. Betas Past Performance Last year, Beta had the following financial data. Sales $30,000,000 Cost of goods sold 18,000,000 Gross profit $12,000,000 Selling and administrative expense 3,000,000 Depreciation expense 4,000,000 Earnings before taxes $5,000,000 Taxes (30%) 1,500,000 Earnings after taxes $3,500,000 Plus depreciation 4,000,000 Cash flow $7,500,000

Debras Projections She was doing a 10 year analysis and expected cash flow to grow by 12% each of the remaining 9 years. She used 10% as the discount rate. She further projected she could sell Beta Transport for $140 million after 10 years and pay 15% tax on the proceeds. Required 1. Project cash flow for the 1st year after the merger. 2. Based on the 12 percent growth rate, project cash flow for the remaining 9 years. Round to the nearest dollar. 3. Discount back each of the 10 years of cash flow at 09 percent. Round to the nearest dollar. Compute the total present value. 4. Discount back the aftertax sales price proceeds after 10 years. Round to the nearest dollar. 5. Add together the answers to questions 3 and 4. Then subtract the purchase price of $110 million for Beta Transport Supply Company. Should the company be purchased? Sales +11% Cost of goods sold +8% Selling and administrative expense +20% Depreciation +10%