Chapter 9 Problem 15
In early 2015, Integrated Communiciations, 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 2014 actual financial figures to answer the questions below.
Fractal Antenna Systems, Inc.
5-year Financial Projection
($ millions)
	Actual 2014	2015	2016	2017	2018	2019
Income statement
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
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
a. Estimate Fractal's free cash flow from 2015 through 2019.
b. Estimate the present value of Fractal's free cash flow for the years 2015 - 2019. 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.
c. Estimate Fractal's value at the end of 2014 assuming it is worth the book value of its assets at the end of 2019.
d. Based on your answer to (c) above, what is the maximum acquisition price Integrated should pay to acquire Fractal's equity?
e. Estimate Fractal's value at the end of 2014 assuming in the years after 2019 the company's free cash flow grows 4 percent per year in perpetuity.
f. Based on your answer to (e) above, what is the maximum acquisition price Integrated should pay to acquire Fractal's equity?
g. Estimate Fractal's value at the end of 2014 assuming that at year-end 2019 the company's equity is worth 15 times earnings after tax and its debt is worth book value.
h. Based on your answer to (g) above, what is the maximum acquisition price Integrated should pay to acquire Fractal's equity?
i. Assuming Fractal has 60 million shares outstanding, what maximum acquisition price per share is consistent with each of the three estimated values of equity determined in (d), (f) and (h)?
j. Which of the three estimated maximum acquisition prices in question (i) above do you think is least reliable?