Instructions: This is a compulsory section. Use the following information to answer Questions 15 and 16. You must show all your work including all intermediate steps, formulas and calculations. Use four decimals in all calculations. Please write all $ figures in million, except per share data On 4h January 2017, Arura Cerritos Quakers Corp (ACQ) made an acquisition bid of $130 per share for all of Thomas Adams Recovery Inc (TAR)'s equity Analysts forecast TAR's income statement and balance sheet to be as follows. Year" denotes the years ending 31st December (in million S) Actual Projected Steady 2019 Year 3100 2018 2000 2500 EBIT Net income Current assets Total assets Current liabilities 500 70 430 1000 910 190 60 360 100 1600 30 570 160 1760 40 170 1500 1600 1700 1900 1870 2090 40 670 Long term debt 600 680 970 1060 1160 1360 Total liabilities and equity1600 760 1870 2090 Other information for TAR and ACQ as of 5th December 2016 Market value of debt Common stock price Common shares outstanding Current debt rating TAR $600 million $100 per share 40 million shares Baa3 /BBB AC S0 $200 per share 100 million shares nal tax rate 40% Analysts forecast that starting from the end of 2019, TAR's free cash flow will settle to a growth rate of 3% per year indefinitely. They believe that TAR aims to keep the current debt ratio constant in the future. TAR has maintained an insignificant amount of cash in the balance sheet (assume cash equals zero throughout). The Weighted Average Cost of Capital (WACC) is the appropriate discount rate for TAR. Analysts also believe that a beta based on analyses of recent past returns is appropriate to assess TAR's risk level in the future. They found from recent stock return analyses that: the variance of TAR's returns is 0.64, the variance of the market returns is 0.16, and the correlation coefficient between TAR and the market returns is 0.75 Debt Rating and Default Premium Table 1 basis Capital Market Information basis 0.01% Maturity (years)Treasury Yields 3 10 5 10 15 30 10 15 20 40 15 25 30 50 20 30 35 55 30 40 45 60 40 49 56 70 50 64 69 80 60 75 88 100 70 85 105 117 80 95 115 140 1-year T-STRIPS Yield 2-year T-STRIPS Yield 0.15% 0.45% 0.75% 250% Debt Aaa/AAA Aa1/AA Aa2/AA Aa3/AA A1/A A2IA A3/A 10-year T-STRIPS Yield Risk Premiums Market-1-year T-STRIPS Market-2-year T-STRIPS Market-3-year T-STRIPS Market-10-year T-STRIPS 7.35% 7.05% 6.75% 5.00% Baa2/BBB Baa3/BBB Analysts identify the following recent acquisitions that they believe to be appropriate to value the acquisition of TAR by ACQ. Analysts conclude that they will rely on the median "Enterprise Value EBITDA" to value TAR using the valuation multiple method, and on the median "Acquisition Premium using the "comparable transaction" method. Acquisition Premium is defined as the percentage difference between the offer price per common share outstanding and the target firm's stock price four weeks before the acquisition announcement. Analysts also include all synergies in their cash flow forecast (presented in the above income statement and balance sheet) and valuation multiples (presented below). Enterprise Acquisition Value/EBITDA Premium Effective date Acquirer Target Dec 18, 2016 Southern Stains PL Restoration Sep 12, 2016 Wellington Inc Aug 25, 2016 Great Medals Yellow Stacks Mar 30, 2016 Barbosa Opp Feb 26, 2016 Oanda Industries Woodland Was 17.00 13.80 12.00 10.40 11.80 56% 32% 35% 18% LA Industries Bobcat Mains Use the above information to answer both required questions 15 and 16. Question 15 Value TAR using 3 methods: (1) the discounted cash flow method, (2) the valuation multiple method, and (3) the comparable transaction method. For each valuation method, calculate the valuation based on Enterprise value, Equity value, and value per share of common equity. Assess whether ACQ's bid of $130 per share for TARs equity is a reasonable offer from ACQ's perspective. (30 marks) Page 11 of 13 Instructions: This is a compulsory section. Use the following information to answer Questions 15 and 16. You must show all your work including all intermediate steps, formulas and calculations. Use four decimals in all calculations. Please write all $ figures in million, except per share data On 4h January 2017, Arura Cerritos Quakers Corp (ACQ) made an acquisition bid of $130 per share for all of Thomas Adams Recovery Inc (TAR)'s equity Analysts forecast TAR's income statement and balance sheet to be as follows. Year" denotes the years ending 31st December (in million S) Actual Projected Steady 2019 Year 3100 2018 2000 2500 EBIT Net income Current assets Total assets Current liabilities 500 70 430 1000 910 190 60 360 100 1600 30 570 160 1760 40 170 1500 1600 1700 1900 1870 2090 40 670 Long term debt 600 680 970 1060 1160 1360 Total liabilities and equity1600 760 1870 2090 Other information for TAR and ACQ as of 5th December 2016 Market value of debt Common stock price Common shares outstanding Current debt rating TAR $600 million $100 per share 40 million shares Baa3 /BBB AC S0 $200 per share 100 million shares nal tax rate 40% Analysts forecast that starting from the end of 2019, TAR's free cash flow will settle to a growth rate of 3% per year indefinitely. They believe that TAR aims to keep the current debt ratio constant in the future. TAR has maintained an insignificant amount of cash in the balance sheet (assume cash equals zero throughout). The Weighted Average Cost of Capital (WACC) is the appropriate discount rate for TAR. Analysts also believe that a beta based on analyses of recent past returns is appropriate to assess TAR's risk level in the future. They found from recent stock return analyses that: the variance of TAR's returns is 0.64, the variance of the market returns is 0.16, and the correlation coefficient between TAR and the market returns is 0.75 Debt Rating and Default Premium Table 1 basis Capital Market Information basis 0.01% Maturity (years)Treasury Yields 3 10 5 10 15 30 10 15 20 40 15 25 30 50 20 30 35 55 30 40 45 60 40 49 56 70 50 64 69 80 60 75 88 100 70 85 105 117 80 95 115 140 1-year T-STRIPS Yield 2-year T-STRIPS Yield 0.15% 0.45% 0.75% 250% Debt Aaa/AAA Aa1/AA Aa2/AA Aa3/AA A1/A A2IA A3/A 10-year T-STRIPS Yield Risk Premiums Market-1-year T-STRIPS Market-2-year T-STRIPS Market-3-year T-STRIPS Market-10-year T-STRIPS 7.35% 7.05% 6.75% 5.00% Baa2/BBB Baa3/BBB Analysts identify the following recent acquisitions that they believe to be appropriate to value the acquisition of TAR by ACQ. Analysts conclude that they will rely on the median "Enterprise Value EBITDA" to value TAR using the valuation multiple method, and on the median "Acquisition Premium using the "comparable transaction" method. Acquisition Premium is defined as the percentage difference between the offer price per common share outstanding and the target firm's stock price four weeks before the acquisition announcement. Analysts also include all synergies in their cash flow forecast (presented in the above income statement and balance sheet) and valuation multiples (presented below). Enterprise Acquisition Value/EBITDA Premium Effective date Acquirer Target Dec 18, 2016 Southern Stains PL Restoration Sep 12, 2016 Wellington Inc Aug 25, 2016 Great Medals Yellow Stacks Mar 30, 2016 Barbosa Opp Feb 26, 2016 Oanda Industries Woodland Was 17.00 13.80 12.00 10.40 11.80 56% 32% 35% 18% LA Industries Bobcat Mains Use the above information to answer both required questions 15 and 16. Question 15 Value TAR using 3 methods: (1) the discounted cash flow method, (2) the valuation multiple method, and (3) the comparable transaction method. For each valuation method, calculate the valuation based on Enterprise value, Equity value, and value per share of common equity. Assess whether ACQ's bid of $130 per share for TARs equity is a reasonable offer from ACQ's perspective. (30 marks) Page 11 of 13