Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is

Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joes Party Supply. Happy Times currently has debt outstanding with a market value of $210 million and a YTM of 8 percent. The companys market capitalization is $310 million and the required return on equity is 13 percent. Joes currently has debt outstanding with a market value of $28 million. The EBIT for Joes next year is projected to be $15 million. EBIT is expected to grow at 7 percent per year for the next five years before slowing to 5 percent in perpetuity. Increases in net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 6 percent, 12 percent, and 5 percent, respectively. Joes has 1.95 million shares outstanding and the tax rate for both companies is 35 percent.

a. What is the maximum share price that Happy Times should be willing to pay for Joes? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b. After examining your analysis, the CFO of Happy Times is uncomfortable using the perpetual growth rate in cash flows. Instead, she feels that the terminal value should be estimated using the EV/EBITDA multiple. The appropriate EV/EBITDA multiple is 7. What is your new estimate of the maximum share price for the purchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

ISE Real Estate Finance And Investments

Authors: Jeffrey Fisher William B. Brueggeman

17th International Edition

1264892888, 9781264892884

More Books

Students also viewed these Finance questions