Mergers and Acquisition Gretsch Industries is considering acquiring Flueger Systems. Although Flueger has said it is not for sale, Gretsch is considering a hostile takeover by making a tender offer directly to Flueger's shareholders. Meghan Doyle, a financial analyst with Gretsch, has been assigned the task of estimating a fair acquisition price for the tender offer. Doyle plans to use three different valuation methods to estimate the acquisition price and has collected the necessary financial data for this purpose. Flueger Systems has 20 million shares outstanding. Doyle has estimated that at the end of each of the next four years, Flueger will have free cash flow to equity (FCFE) (in millions) of $24, $27, $32, and $36. After the fourth year, Doyle expects Flueger's FCFE to grow at a constant rate of 6% per year. She also determines that Flueger's cost of equity of 10.5% is the appropriate discount rate to use for the analysis. Doyle has also found three companies that are in the same industry as Flueger and have a similar capital structure-Behar Corporation, Walters Inc., and Hasselbeck Dynamics. In addition, Doyle has identified data for three takeover transactions with characteristics similar to Flueger-Bullseye, Dart Industries, and Arrow Corp. Data for both sets of firms are shown in the following figure. Company Statistics Current stock price Earnings per share (EPS) (S) Book value per share (S) Sales per share (S) Company Statistics Flueger Systems Stock price pre-takeover Acquisition stock price Earnings per share (EPS) ($) Book value per share ($) Sales per share ($) A. $27.50. B. $29.78. C. $33.02. $32.00 1.75 9.75 29.75 Bullseye $18.25 $22.00 0.95 6.10 17.60 Behar Corporation $54.00 2.80 17.25 52.75 Walters Inc. $36.50 Dart Industries $27.80 $35.00 1.65 9.85 26.75 2.10 12.10 37.80 Hasselbeck Dynamics Arrow Corp. $43.00 $52.00 2.50 14.20 39.75 $108.20 6.50 35.75 105.00 Lily 1. The value per share of Flueger stock using the discounted cash flow approach is closest to: 1. The value per share of Flueger stock using the discounted cash flow approach is closest to: A. $27.50. B. $29.78. C. $33.02. 2. The average stock price of Flueger Systems under the comparable company approach for the three relative valuation ratios, assuming it is traded at the mean of the three valuations, is closest to: A. $27.50. B. $30.33. C. $32.00. 3. Using the comparable company approach, the mean takeover premium is closest to: A. 30.4% B. 22.4% C. 15.6% 4. Using the comparable company approach, the estimate of the fair acquisition price for Flueger Systems is closest to: A. $37.12 B. $40.28 C. $50.12 5. The fair acquisition price for Flueger Systems using the comparable transaction approach is closest to: A. $30.33. B. $32.50. C. $37.20
