Earlier today, you were unexpectedly contacted by J.J. Bluejay, IV, the newly appointed treasurer of the Bluejay Corp. Although publicly traded, Bluejay Corp. is 35% controlled by the Bluejay family which in turn is 100% controlled by J.J. Bluejay, III, Chairman and CEO of the corporation. The new treasurer brings emminent qualifications to the task: he has 1) studied at various undergraduate institutions for ten years, 2) managed the financial budget of a Tibetan monastery, and 3) most importantly, is a Bluejay. J.J. contacted you this morning because he needs the advice and discretion that only you, his lender and trusted financial advisor, can provide. J.J. has been asked to approve funding for a proposed acquisition of Cardinal, Inc., a firm serving the birdbath fixture industry. Bluejay's Business Planning and Development Department (BPDD) has recommended this purchase for various strategic reasons. Foremost among the reasons, was the result of BPDD's independent valuation analysis. This study showed that Cardinal's calculated value of $531 million was substantially higher than its current market value of $375 million. (The BPDD calculated the $531 million by using the birdbath industry's average P- E (price earnings) ratio of 10 multiplied by Cardinal's earning this year of $53 million) Assuming a purchase price 15% over the market value, the analysts in the BPDD see a chance to create approximately $100 million in value ( $531 million - $431.5 million) even without considering synergies! Although J.J. lacks the requisite financial acumen for his job, he is quite cautious about investing corporate funds. In your telephone conversation, he commented "We're not talking chickenfeed! No decision involving $431.5 million can be as easy as the business planning and development department wants it to seem, especially when it involves cash that my family controls. Please remember, every dollar that I lose will mean $.35 less in inheritance to me. Can you help me value Cardinal? Oh, by the way, I need the value within an hour and if my dad ever hears a chirp about this, I'll fly the coop and we'll cancel our banking relationship with you." When J.J. telephones again --in less than an hour from now-- he will probably have the following questions: 1. What cost of capital should be used to value Cardinal? Why? That is, why is that rate the appropriate one? 2. Assuming the purchase price of $431.5 million, what is the net present value of this transaction? Should Bluejay Corp. make the acquisition? 3. Under the current scenario, if Bluejay did make the acquisition, what should happen to its own stock price? Now, assume that once Bluejay takes control, it will close Cardinal's prefab birdhouse business. This segment has been losing money for several years. Cash losses of $18 million are expected to continue for seven years at which point it was expected to generate $3 million in cash per year, forever. (Cardinal kept the segment for undisclosed strategic reasons.) 4. What is the net present value of acquiring Cardinal, now? 5. J.J. wants to borrow $125 million to help finance the purchase and repay principal and interest of $20 million per year for 10 years solely from the cash flow generated by the acquisition (assume no tax effect). Would you grant the credit? Why or why not? (Note: the payment of $20 million is an ordinary annuity at a 10% lending rate.) 6. A week has past since J.J. first contacted you. Since then inflation fears have subsided. Thus, the long- term required rates of return have declined by 3 percentage points (across the board). What is the net present value now? 7. Given this change in rates, J.J. now wishes to finance most of the purchase with a loan of $300 million payable in installments of $50 million (principal and interest) over 8 years. Repayment will come solely from Cardinal's cash flows. Should you make the loan? (Note: the $50 million payment is an ordinary annuity at a 7% lending rate.) will receive the residual cash at the end of each year listed. Earlier today, you were unexpectedly contacted by J.J. Bluejay, IV, the newly appointed treasurer of the Bluejay Corp. Although publicly traded, Bluejay Corp. is 35% controlled by the Bluejay family which in turn is 100% controlled by J.J. Bluejay, III, Chairman and CEO of the corporation. The new treasurer brings emminent qualifications to the task: he has 1) studied at various undergraduate institutions for ten years, 2) managed the financial budget of a Tibetan monastery, and 3) most importantly, is a Bluejay. J.J. contacted you this morning because he needs the advice and discretion that only you, his lender and trusted financial advisor, can provide. J.J. has been asked to approve funding for a proposed acquisition of Cardinal, Inc., a firm serving the birdbath fixture industry. Bluejay's Business Planning and Development Department (BPDD) has recommended this purchase for various strategic reasons. Foremost among the reasons, was the result of BPDD's independent valuation analysis. This study showed that Cardinal's calculated value of $531 million was substantially higher than its current market value of $375 million. (The BPDD calculated the $531 million by using the birdbath industry's average P- E (price earnings) ratio of 10 multiplied by Cardinal's earning this year of $53 million) Assuming a purchase price 15% over the market value, the analysts in the BPDD see a chance to create approximately $100 million in value ( $531 million - $431.5 million) even without considering synergies! Although J.J. lacks the requisite financial acumen for his job, he is quite cautious about investing corporate funds. In your telephone conversation, he commented "We're not talking chickenfeed! No decision involving $431.5 million can be as easy as the business planning and development department wants it to seem, especially when it involves cash that my family controls. Please remember, every dollar that I lose will mean $.35 less in inheritance to me. Can you help me value Cardinal? Oh, by the way, I need the value within an hour and if my dad ever hears a chirp about this, I'll fly the coop and we'll cancel our banking relationship with you." When J.J. telephones again --in less than an hour from now-- he will probably have the following questions: 1. What cost of capital should be used to value Cardinal? Why? That is, why is that rate the appropriate one? 2. Assuming the purchase price of $431.5 million, what is the net present value of this transaction? Should Bluejay Corp. make the acquisition? 3. Under the current scenario, if Bluejay did make the acquisition, what should happen to its own stock price? Now, assume that once Bluejay takes control, it will close Cardinal's prefab birdhouse business. This segment has been losing money for several years. Cash losses of $18 million are expected to continue for seven years at which point it was expected to generate $3 million in cash per year, forever. (Cardinal kept the segment for undisclosed strategic reasons.) 4. What is the net present value of acquiring Cardinal, now? 5. J.J. wants to borrow $125 million to help finance the purchase and repay principal and interest of $20 million per year for 10 years solely from the cash flow generated by the acquisition (assume no tax effect). Would you grant the credit? Why or why not? (Note: the payment of $20 million is an ordinary annuity at a 10% lending rate.) 6. A week has past since J.J. first contacted you. Since then inflation fears have subsided. Thus, the long- term required rates of return have declined by 3 percentage points (across the board). What is the net present value now? 7. Given this change in rates, J.J. now wishes to finance most of the purchase with a loan of $300 million payable in installments of $50 million (principal and interest) over 8 years. Repayment will come solely from Cardinal's cash flows. Should you make the loan? (Note: the $50 million payment is an ordinary annuity at a 7% lending rate.) will receive the residual cash at the end of each year listed