Complete the worksheet below before you estimate the value of the target based on this information.

Solution:

Valuation of Singapore Target Based on the Assumptions Provided (numbers are in millions)

Year 1 Year 2 Year 3

Revenue S$100 S$110 S$121

Cost of Goods Sold S$50 S$55 S$60.50

Gross Profit S$50 S$55 S$60.50

Selling & Admin. Exp. S$10 S$10 S$10

Depreciation S$5 S$5 S$5

Earnings Before Taxes S$35 S$40 S$45.50

Tax (20%) S$7 S$8 S$9.10

Earnings After Taxes S$28 S$32 S$36.40

+Depreciation S$5 S$5 S$5

-Funds to Reinvest S$3 S$3 S$3

Sale of Firm S$200

Cash Flows in S$ S$30 _____ _____

Exchange Rate of S$ $.70 _____ _____

Cash Flows in $ $21 _____ _____

PV (9% disc. rate)

Cumulative PV

41. Based on the information provided above, what is the value (NPV) of the Singapore target?.

a. $19.266 million

b. $39.298 million

c. $168.160 million

d. $128.861 million

42. Based on the information above, what is the Singapore target's value based on its stock price?

a. $5 million

b. $25 million

c. $125 million

d. $87.5 million

43. Refer to Exhibit above, the target's board has indicated that it finds a premium of 25 percent appropriate. Is that maximum percentage premium feasible given your numbers?

a. No, they cannot afford to pay 25% premium, because the markets valuation is below John Deers valuation (stock is underpriced).

b. No, they should not offer any premium because the market's valuation is above John Deer's valuation (stock is overpriced).

c. No, they should only pay up to 8% premium, because the markets valuation is below John Deers valuation by 8% only).

d. Yes, they should be able to offer 25% premium since markets valuation is well below John Deers valuation (stock is underprice).