Case Setting:

United Health Products (UHP) currently offers a wide selection of over-the-counter health products. The brand name is respected and 90% of their products are geared toward the alleviation of common pain symptoms. They include analgesics, cold and flu remedies & allergy products. The company has been highly profitable in the industry with a market strategy of rebranding existing projects once the patent expires. This has allowed the company to minimize research and development expenses.

Joan Rather, UHP CEO, has been advised by your analyst team that research indicates that the sales of vitamin and other health supplements will be the largest growing market over the next few years. The company currently does not have a footprint in this market and you have recommended that, in order to remain competitive in the future, the CEO should consider expanding the company's line of products by acquiring a company that is already established in the health supplement market.

You have identified a company called VitaMed that seems to have the potential to meet the goals of UHS's potential product expansion plan. VitaMed is a family run business that specializes in the health supplement market. They produce most of their products in a company-owned facility with excellent quality control. They have a good reputation but have struggled with finding a consistent distribution system to get their products on the market and while their products are highly regarded, they are not as visible in the marketplace as some of their competitor's brands. Your team needs to value the company in order to make a decision on whether to pursue the acquisition. You intend to use an NPV analysis to determine project viability but cannot begin the evaluation until you have determined the WACC for the acquisition project. Since VitaMed is a private company, market return data is not available. However, you have identified three companies whose businesses focus on the vitamin and health supplement sector:

New You, Inc. is an independent manufacturer and distributor of vitamins and health supplements. which account for 80% of their revenue. In addition, the company markets a line of specialized containers that are designed to dispense medications safely for patients suffering from Alzheimers Disease or other memory impairment conditions. Their products are sold both over-the-counter under their own name brand but also promoted through a network of physician providers under a separate trademark. Production and quality control are managed through a chain of company-owned facilities across the country. New You has independent quality control measures that ensure that their products meet high standards.

Innovative Health, Inc. is a respected company whose product line is focused on the health supplement market. They have a stable line of established products that are produced in their own facility and sold along the East Coast. They also are developing a new line of "Super Supplements" to meet a growing customer demand that is expected to be a significant driver in industry revenues in the future. They have several promising products in their research pipeline that have the potential to be highly profitable and increase their market visibility across the country.

Better Living, Inc is successful marketer and distributor of health supplement products. They have a good brand image and a wide distribution network. The majority of their revenues stem from over-the-counter sales made through large chain pharmacies like CVS and Walgreens. 70% of their products are produced in company-owned facilities while the other 30% of production is outsourced to companies in China and India. They institute an independent quality control process to assure consistent standards.

Using the information provided below, estimate the appropriate WACC for use in an NPV project acceptance analysis for the VitaMed acquisition. When you have completed your work, you must enter the values for the main components of your WACC calculation on the Final Assignment Answer Input Sheet.

Quiz Instructions

Please use the questions below to input your calculations for the WACC for the Final Individual Assignment.

Question 1

The value for the unlevered beta of New You, Inc. is

Question 2

The value for the unlevered beta of Innovative Health, Inc is

Question 3

The value for the unlevered beta of Better Living, Inc is

Question 4 1

I have chosen the following companies to use as comparables in estimating the WACC for VitaMed (multiple choice):

United Health Products

New You, Inc

Innovative Health

Better Living, Inc.

Question 5

What is the value of the beta that you used in the WACC equation? (Numerical Answer)

Question 6

What number did you use for D/V in the WACC equation?

Question 7

What number did you use for E/V in the WACC equation?

Question 8

What rate did you choose for the risk-free rate?

Question 9

What number did you use for the market premium?

Question 10

What tax rate did you use in calculating the WACC?

Question 11

What cost of debt did do you use in calculating the WACC for VitaMed?

Question 12

What was your estimate for the WACC for VitaMed?

Question 13

If you learned that United Health Products intended to finance the acquisition of VitaMed with 75% debt, how would your answers to any of the questions above change? (A general verbal reply is sufficient.)

Exhibit 1- Market Value Target Leverage Ratios ebt as a percentage of value Average Cost of De bt United Health Products New You, Inc Innovative Health Better Livihg, Inc. 30% 3090 40% 2590 7% 10% 12% 890 Exhibit 2 - Company Data Current Average Beta Leverage Return Market Revenues (in Effective tax rate SBillions) Ratio United Health Products 15% | 0.88 50% 12 .36 ew You, Inc 13% 1.2 20% .30 novative Health 1796 | 1.07 60% .30 etter Living. Inc. 14% 15% 0.5 .30 Exhibit 3 Government Bond Rates & Market Spread Data Spread Between S&P 500 Composite Retums & Government Bond Returns US Govenment Bond Rates 1-year 10-year 30-year 7.00% 8.05% 8.95 16% 12.50% Short Term (3-year average) ong Term (12-year average)