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.

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?

2019 742 FRACTAL ANTENNA SYSTEMS INC. INCOME STATEMENT ($ millions) Actual Forecast 2014 2015 2016 2017 $1,996 $2,267 $2,508 $2,827 644 830 959 1,352 1,525 1,678 1,868 492 785 1,301 171 178 191 212 239 270 306 477 323 156 86 186 126 61 $291 $197 $95 $52 $3,571 1,241 2,330 917 Net sales Cost of sales Gross income Depreciation Interest expense Operating expenses Net income before tax Provision for taxes Net income after tax 1,061 2018 $3,138 1,087 2,051 1,009 142 334 566 221 $345 175 110 374 929 363 $566 34 $358 $545 309 541 629 Cash and securities Accounts receivable Inventory Other current assets Total current assets Gross property and equipment Accumulated depreciation Net property and equipment Goodwill Total assets Accounts payable Short-term debt Current portion long-term debt Accrued expenses Total current liabilities Long-term debt Deferred taxes Shareholders' equity Total liabilities and equity BALANCE SHEET ($ millions) $413 $462 208 236 267 399 463 156 122 142 1,121 1,234 1,412 4,180 5,149 6,410 868 1,654 2,714 3,312 3,495 3,696 1,069 1,069 1,069 5,502 5,798 6,177 104 77 91 335 482 842 41 140 165 86 120 566 796 1,218 1,694 1,554 1.389 335 344 370 2,907 3,104 3,200 $5,502 $5,798 $6,177 167 1,650 7,449 4,015 3,434 1.069 6,153 110 814 200 134 1,258 1,189 454 3,252 $6,153 $618 354 739 212 1,923 8.200 5,024 3,176 1,069 6,168 117 585 223 174 1,099 966 505 3,598 $6,168 $704 405 864 206 2,179 9,016 5,941 3,075 1,069 6,323 135 393 267 168 963 699 496 4,165 $6,323 97 2019 742 FRACTAL ANTENNA SYSTEMS INC. INCOME STATEMENT ($ millions) Actual Forecast 2014 2015 2016 2017 $1,996 $2,267 $2,508 $2,827 644 830 959 1,352 1,525 1,678 1,868 492 785 1,301 171 178 191 212 239 270 306 477 323 156 86 186 126 61 $291 $197 $95 $52 $3,571 1,241 2,330 917 Net sales Cost of sales Gross income Depreciation Interest expense Operating expenses Net income before tax Provision for taxes Net income after tax 1,061 2018 $3,138 1,087 2,051 1,009 142 334 566 221 $345 175 110 374 929 363 $566 34 $358 $545 309 541 629 Cash and securities Accounts receivable Inventory Other current assets Total current assets Gross property and equipment Accumulated depreciation Net property and equipment Goodwill Total assets Accounts payable Short-term debt Current portion long-term debt Accrued expenses Total current liabilities Long-term debt Deferred taxes Shareholders' equity Total liabilities and equity BALANCE SHEET ($ millions) $413 $462 208 236 267 399 463 156 122 142 1,121 1,234 1,412 4,180 5,149 6,410 868 1,654 2,714 3,312 3,495 3,696 1,069 1,069 1,069 5,502 5,798 6,177 104 77 91 335 482 842 41 140 165 86 120 566 796 1,218 1,694 1,554 1.389 335 344 370 2,907 3,104 3,200 $5,502 $5,798 $6,177 167 1,650 7,449 4,015 3,434 1.069 6,153 110 814 200 134 1,258 1,189 454 3,252 $6,153 $618 354 739 212 1,923 8.200 5,024 3,176 1,069 6,168 117 585 223 174 1,099 966 505 3,598 $6,168 $704 405 864 206 2,179 9,016 5,941 3,075 1,069 6,323 135 393 267 168 963 699 496 4,165 $6,323 97