Chapter 9 Problem 15: Fractal Antenna Systems Inc. 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. Give Fractal's free cash flow from 2018 through 2022. Give 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 8.2 percent. Estimate Fractal's firm value at the end of 2017 under each of the following terminal value scenarios: Projected book value of assets at the end of 2022 Perpetual growth in free cash flow at 4% per year after 2022 Equity is worth 15 times after-tax earnings and debt is worth book value 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 212 239 270 306 334 374 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 $566 BALANCE SHEET ($ millions) Cash and securities $358 $413 $462 $545 $618 $704 Accounts receivable 208 236 267 309 354 405 Inventory 399 463 541 629 739 864 Other current assets 156 122 142 167 212 206 Total current assets 1,121 1,234 1,412 1,650 1,923 2,179 Gross property and equipment 4,180 5,149 6,410 7,449 8,200 9,016 Accumulated depreciation 868 1,654 2,714 4,015 5,024 5,941 Net property and equipment 3,312 3,495 3,696 3,434 3,176 3,075 Goodwill 1,069 1,069 1,069 1,069 1,069 1,069 Total assets 5,502 5,798 6,177 6,153 6,168 6,323 Accounts payable 104 77 91 110 117 135 Short-term debt 335 482 842 814 585 393 Current portion long-term debt 41 140 165 200 223 267 Accrued expenses 86 97 120 134 174 168 Total current liabilities 566 796 1,218 1,258 1,099 963 Long-term debt 1,694 1,554 1,389 1,189 966 699 Deferred taxes 335 344 370 454 505 496 Shareholders' equity 2,907 3,104 3,200 3,252 3,598 4,165 Total liabilities and equity $5,502 $5,798 $6,177 $6,153 $6,168 $6,323