Lubri-Tech Technologies is a small public company located in Brownsburg Indiana that specializes in friction reducing oil additives that increase the wear-resistance of metals. This technology has been shown to greatly extend the life of internal combustion motors used in marine and other recreational applications. Given the recent success of companies in this arena (such as Lucas Oil Products), it is anticipated that friction-reducing oil additives will be increasingly utilized in the automotive and related industries in the future. As a member of the M&A analysis team for Lucas Oil Products, you have been assigned the task to (a) estimate the value of LubriTech Technologies using the FCF valuation approach (using historical figures as the appropriate FCF valuation input parameters to start with), and (b) determine if there is any logical reason to pursue Lubri-Tech Technologies further as an acquisition target at this time.

Input parameters for valuing Lubri-Tech Technologies using the FCF approach Note: g, b, T, are based on historical estimates over the past 3 years. X0 = EBIT = $3.5 million g = growth rate of EBIT (3 year historical) = .30 b = ratio of reinvestment (3 year historical) = .90 T = Tax rate = .30 K = Cost of capital = 11.6%

a) What is the value of Lubri-Tech Technologies assuming that it reinvests at its historical rate (b) for the next 6 years and experiences its historical rate of growth from investment? Assume net reinvestment to be zero after the 6-year period (remember that the investment in period 6 will cause EBIT growth in year 7, with constant EBIT afterward). Apply both the spreadsheet approach and the formula approach here to show their equivalence. Note: The spreadsheet approach entails projecting each year's cash flows as is done on page 9 of the valuation lecture notes (lesson 2), rather than simply plugging the figures into the model that I made available in an Excel spreadsheet with lesson 2. The latter is the formula approach, modeled in a spreadsheet. You may use it where I request that you use the formula approach.

b) What is the implied profitability rate?

c) What is the implied value per share of Lubri-Tech Technologies stock assuming that the company has $12 million of debt outstanding (8% interest rate) and 4.1 million outstanding shares of stock? (5 pts) d) Suppose the current stock price of Lubri-Tech Technologies is $8.54 per share. Given your understanding of typical takeover premiums and assuming you are confident that your per-share valuation in part

c) above is accurate, would you advise Lucas Oil Products to make an acquisition offer? If so, at what price per share? Clearly explain your reasoning.