It is early January 2020 and Mr. Cause, an analyst with the M&A group of Merrill Flinch, was assigned to work with client John, a producer of fancy French diapers and upscale baby grooming products. John has been considering diversifying its operations and has identified a possible opportunity to acquire Colonel Mills, a food company that produces a wide variety of types of food, including a line of baby food. John has asked Merrill Flinch to determine how much Colonel Mills would be worth under John's ownership.

Mr. Cause and the Chief Financial Officer of John met and put together the following assumptions and information.

Acquisition Assumptions:

1. Colonel Mills sales will grow at 6% per year in 2020-2022.
2. Colonel Mills cost of goods sold, which does not include depreciation expense, will remain at 70 percent of sales.
3. Selling and administrative expenses will fall from 25 percent of sales to 20 percent of sales.
4. Depreciation expense will be $15 million per year.
5. Planned capital expenditures will be exactly equal to annual depreciation expense.
6. Corporate taxes will be paid at the 35 percent rate.
7. Net working capital is expected to be 25 percent of sales.
8. Colonel Mills terminal value at the end of year 2022 will be 10 times 2022 free cash flow.
9. Management believes both firms are currently at their appropriate target capital structure.
10. The acquisition would happen immediately.

2019 INCOME STATEMENT (000s)
	Colonel Mills
Net sales	1,875,000
Cost of goods sold	1312,500
Gross margin	562,500
Selling and administrative	468,750
Depreciation	15,000
Earnings before interest and taxes	78,750
Interest expense	24,596
Income tax @ 35%	18,953
Net profit after tax	35,200.1

FINANCIAL INFORMATION JANUARY 3, 2020
Firm Financial Data	John	Colonel Mills
Current stock price	$20.00	$66.73
Shares outstanding (in 000s)	100,000	10,000
Levered equity beta	1.2	1.0
Current debt level (in 000s)	500,000	286,000
Cost of debt	8.8%	8.6%
D/V	20%	30%
Tc	35%	35%
Risk Free Rates
1 yr. Treasury bill	5.00%
30 yr. Treasury bond	5.40%
Market Risk Premiums
Rf	9.5%
(Rf = 1 yr. Treasury rate)
Rf	7.8%
(Rf = Long-Term Government bond)

Please present the following analysis: Forecast Colonel Mills free cash flows for 2000-2022 using the assumptions above and the data in Exhibit 1.

1. Determine the appropriate WACC, using the data in Exhibit 2.
2. What is the total value of Colonel Mills under John's ownership?
3. What is the maximum per share price John should be willing to pay for Colonel Mills?