Harris asked his financial advisors to determine the financing options for the acquisition. His advisors suggested two alternatives: 100% debt financing, or a mix of debt and equity financing. The $120 million, all-debt financing would be arranged by Stanley Investment Company, through a syndicated loan package. This loan would carry 5.5% annual interest and mature at the end of 2023. The loan principal would be amortized at the rate of $5 million a year, for six years, starting in 2017, and the final payment of $90 million would be made at loan maturity. This loan would be collateralized by all the assets of the combined firm. Under the alternative plan, a group of investors would provide $60 million each in loans and equity. The loan would carry a 5% interest rate and mature at the end of year 2020. The loan principal of $60 million would be due in its entirety upon maturity. This debt also would be collateralized by all the assets of the combined firm. The equity investment would be provided in exchange for 40% equity ownership in the combined firm. New equity holders would not be entitled to receive dividends until the debt principal was paid in full.

Harris wondered which direction he should take the company he had started more than 30 years ago. He was confident that Landmark would be a strong addition to Broadway, but he also sensed concern from his team of financial advisors and reluctance from his fellow board members at Broadway. Could he justify meeting the purchase price demanded by Landmark? If he made the acquisition, what would be the best way to finance the transaction to ensure the viability of Landmark and maximize the value to Broadway?

QUESTION: Apply the discounted cash flow approach using WACC and project the Free Cash Flows (FCFs) to evaluate an acquisition opportunity. For the next five years starting form 2019

2010 20112012 2013 2014 [E ncom taxes Income Statmat Net Sale 259.9 3041 3164 3290 3455 259.4 2 254. 2953 3104 $1.23 1.21 122 $1.23 $1.30 502450.24024 $0.24$024 0.5 310 23 33 20.9 216 267256 1.6 16 17 17 135 146152 Opeenting Prof 17.7 155 206 209 Incomne taes 16.0 17.4 1S6 19.7 52 5.1 nvestmants and other aaets 130 $1.2 $055 $0.52 $049 20 0.20 $0.20 95.8 Accounts payable 11.5 3.6 2 20.7 220 293 304 Cumant Liabllmies 103 10.8 114 128 13.1 112 125 30.6 313 37.5 36.9 3.1 5.1 5.0 47 7476 37 836 2.0 937 5.6 53 76 9 10.4 Other non-curant kabditiocs 11A Net PP&E Investmennts ana other assets Total Habillts nd a 696 Accourts payabla Cureettabiliie Exhibit 3a Fize-year Forecast of Landmark's Icome and Cash Flow, 2015-2019 ( millons) 5.6 53 11.6 114 13.9 139 15.0 13 155 16.6 175 170 13 561 36.7 13.6 44.0 12.6 4694.449. 2016 2017 Other ron-carrent liabilities 3628 3809 40 441.0 Opeling prof Not incom. 3.5 33.9 4.1 Tetal liabilitien and Change tnnetworcing apital 13 1415 Exhibit 2 Ercadsay Industries. Simplifie d Financial 5tatements, 2010-2014 (S millions Exhibit 3b Five-year Forecast of Broadway's Income and Cash Flow 2015-2019 (S millions 2010 20112012 2013 2014 E 2017 201 Netl Opeenting prafit 654 175 1994 T.D 137.8 1435 1495 155.3 1619 126 1315 3 145 486 11.7 12.0 12.4 125 Nst sala 29 29 290 3.3 35 37 Dupreciaticn and amorlizaticn pcratine prof: Change in net worktng capatal 7.0 47 4.9 2010 20112012 2013 2014 [E ncom taxes Income Statmat Net Sale 259.9 3041 3164 3290 3455 259.4 2 254. 2953 3104 $1.23 1.21 122 $1.23 $1.30 502450.24024 $0.24$024 0.5 310 23 33 20.9 216 267256 1.6 16 17 17 135 146152 Opeenting Prof 17.7 155 206 209 Incomne taes 16.0 17.4 1S6 19.7 52 5.1 nvestmants and other aaets 130 $1.2 $055 $0.52 $049 20 0.20 $0.20 95.8 Accounts payable 11.5 3.6 2 20.7 220 293 304 Cumant Liabllmies 103 10.8 114 128 13.1 112 125 30.6 313 37.5 36.9 3.1 5.1 5.0 47 7476 37 836 2.0 937 5.6 53 76 9 10.4 Other non-curant kabditiocs 11A Net PP&E Investmennts ana other assets Total Habillts nd a 696 Accourts payabla Cureettabiliie Exhibit 3a Fize-year Forecast of Landmark's Icome and Cash Flow, 2015-2019 ( millons) 5.6 53 11.6 114 13.9 139 15.0 13 155 16.6 175 170 13 561 36.7 13.6 44.0 12.6 4694.449. 2016 2017 Other ron-carrent liabilities 3628 3809 40 441.0 Opeling prof Not incom. 3.5 33.9 4.1 Tetal liabilitien and Change tnnetworcing apital 13 1415 Exhibit 2 Ercadsay Industries. Simplifie d Financial 5tatements, 2010-2014 (S millions Exhibit 3b Five-year Forecast of Broadway's Income and Cash Flow 2015-2019 (S millions 2010 20112012 2013 2014 E 2017 201 Netl Opeenting prafit 654 175 1994 T.D 137.8 1435 1495 155.3 1619 126 1315 3 145 486 11.7 12.0 12.4 125 Nst sala 29 29 290 3.3 35 37 Dupreciaticn and amorlizaticn pcratine prof: Change in net worktng capatal 7.0 47 4.9