in early 2018, integrated Communications, Ltd. was interested in acquiring Fractal Amenna systems, inc., a privatery nesa 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 Fractals 2017 actual financial figures to answer the questions below. a. Estimate Fractal's free cash flow from 2018 through 2022. b. Estimate the present value of Fractals free cash flow for the years 2018 to 2022. Integrated's WACC is 8.0 percent. Fractals WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. e. Estimate Fractals firm value at the end of 2017 under each of the following terminal value scenarios: i. Projected book value of assets at the end of 2022 ii. Perpetual growth in free cash flow at 4% per year after 2022 iii. Equity is worth 15 times after-tax earnings and debt is worth book value d. Assuming Fractal has 60 million shares outstanding, what is the maximum price per share Integrated should pay to acquire Fractals equity in each of the three scenarios? e. Which of the three estimated maximum acquisition prices in question (1) above do you think is least reliable? FRACTAL ANTENNA SYSTEMS INC. INCOME STATEMENT ($ millions) Actual Forecast 2017 2018 2019 2020 2021 2022 $2,827 Net sales Cost of sales 959 1,868 1,301 175 306 86 34 $52 $545 309 629 167 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 Gross income Depreciation Interest expense Operating expenses Net income before tax Provision for taxes Net income after tax 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 debe | Current portion long-term debt Accrued expenses Total current liabilities Long-term debt Deferred taxes Shareholders' equity Total liabilities and equity $1,996 644 1,352 492 171 212 477 186 $2,267 $2,508 742 830 1,525 1,678 785 1,061 178 191 239 270 323 156 126 61 $291 $197 $95 BALANCE SHEET ($ millions) $358 $413 $462 208 236 267 399 463 541 156 122 142 1,412 6,410 2,714 3,696 1,069 6,177 91 842 165 120 1,218 1,389 370 3,200 $6,177 1,121 4,180 868 3,312 1,069 5,502 104 335 41 86 566 1,694 335 2,907 $5,502 1,234 5,149 1,654 3,495 1,069 5,798 77 482 140 97 796 1,554 344 3,104 $5,798 $3,138 1,087 2,051 1,009 142 334 566 221 $345 $618 354 739 212 1,923 5,024 3,176 1,069 6,168 117 585 223 174 1,099 966 505 3,598 $6,168 $3,571 1,241 2,330 917 110 374 929 363 $566 $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 $6,323 in early 2018, integrated Communications, Ltd. was interested in acquiring Fractal Amenna systems, inc., a privatery nesa company producing compact antennae. As a first step in deciding what price to bid for Fractal, Integrated's finance department has prepared a five-year financial projection for the company assuming an acquisition. Use this projection and Fractals 2017 actual financial figures to answer the questions below. a. Estimate Fractal's free cash flow from 2018 through 2022. b. Estimate the present value of Fractals free cash flow for the years 2018 to 2022. Integrated's WACC is 8.0 percent. Fractals WACC is 11.5 percent, and the average of the two companies' WACCs, weighted by sales, is 8.2 percent. e. Estimate Fractals firm value at the end of 2017 under each of the following terminal value scenarios: i. Projected book value of assets at the end of 2022 ii. Perpetual growth in free cash flow at 4% per year after 2022 iii. Equity is worth 15 times after-tax earnings and debt is worth book value d. Assuming Fractal has 60 million shares outstanding, what is the maximum price per share Integrated should pay to acquire Fractals equity in each of the three scenarios? e. Which of the three estimated maximum acquisition prices in question (1) above do you think is least reliable? FRACTAL ANTENNA SYSTEMS INC. INCOME STATEMENT ($ millions) Actual Forecast 2017 2018 2019 2020 2021 2022 $2,827 Net sales Cost of sales 959 1,868 1,301 175 306 86 34 $52 $545 309 629 167 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 Gross income Depreciation Interest expense Operating expenses Net income before tax Provision for taxes Net income after tax 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 debe | Current portion long-term debt Accrued expenses Total current liabilities Long-term debt Deferred taxes Shareholders' equity Total liabilities and equity $1,996 644 1,352 492 171 212 477 186 $2,267 $2,508 742 830 1,525 1,678 785 1,061 178 191 239 270 323 156 126 61 $291 $197 $95 BALANCE SHEET ($ millions) $358 $413 $462 208 236 267 399 463 541 156 122 142 1,412 6,410 2,714 3,696 1,069 6,177 91 842 165 120 1,218 1,389 370 3,200 $6,177 1,121 4,180 868 3,312 1,069 5,502 104 335 41 86 566 1,694 335 2,907 $5,502 1,234 5,149 1,654 3,495 1,069 5,798 77 482 140 97 796 1,554 344 3,104 $5,798 $3,138 1,087 2,051 1,009 142 334 566 221 $345 $618 354 739 212 1,923 5,024 3,176 1,069 6,168 117 585 223 174 1,099 966 505 3,598 $6,168 $3,571 1,241 2,330 917 110 374 929 363 $566 $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