Neuqun, Inc., a publicly traded firm, is considering the acquisition of a private company, Artforever.com, which specializes in restoring damaged artwork and vintage photographs for high net worth individuals. Neuquns CEO and chairman of the board, Willie Ray, described the motivation for the acquisition as follows: We are running out of profitable investment opportunities in our core vintage shoe restoration business, and our shareholders expect us to continue to grow. Therefore, we must look to acquisitions to expand into growing markets.

Neuqun, Inc.s common stock is currently trading at $50 per share, and the firm has 100,000 shares outstanding. The book value of the common stock is $20 per share. However, as mentioned by Mr. Ray, sales had been slowing recently and the board was concerned that soon the share price would also begin to flag as investors figured out that the firm was running out of positive NPV investments. The firm has $2,000,000 market value of bonds trading at a yield to maturity of 6.2%.

You have been hired as a consultant to Neuqun to evaluate the proposed acquisition of Artforever.com. There is considerable dissension among senior management and the board about whether the acquisition should be undertaken. Your job is to perform a thorough analysis of the merits of the proposed acquisition and make a recommendation to senior management.

After several meetings with Neuqun management and a review of Artforevers financial performance and industry structure, you gathered the data shown in Table 1 below.

Artforever.com currently has $1,475,000 (market value) in long-term debt, with a coupon rate of 7%. Its cost of goods sold (COGS) is expected to be 42% of sales revenues, and selling, general and administrative (SG&A) expenses are expected to be 15 percent of revenues. The depreciation numbers listed above are already included in COGS percentage estimates. The firms corporate tax rate is 40% and its current cost of borrowing is 6.2%.

Your research indicates that Artforever has a target debt to value ratio of 15%, based on its assessment of the probability and costs of financial distress. You note that this is different from the capital structure of Neuqun and wonder how this would factor into your analysis.

Although Artforever.com is a rapidly growing company, your analysis of industry structure suggests that competition in the art restoration market is likely to increase in the next few years. Thus, you forecast that the perpetual growth rate for free cash flows beyond 2022 will be a more modest 2.0% per year.

Your analysis of market data yielded the information in Table 2 below.

Your analysis of Artforever.coms industry reveals that most of the firms in the industry, like Artforever, are private firms. However, you find a close competitor, ArtToday.net, that is in the same line of business and is publicly traded. ArtToday has a long-term target debt to equity ratio of 0.75, and has been historically quite close to that target. Your analysis of ArtTodays historical returns against the market returns yields an equity beta of 1.5. ArtToday currently has 50,000 common shares outstanding trading at $12 per share. Assume that both companies face a similar tax rate.

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3. Based on your answers to questions (1) and (2) above, what is the maximum price that Neuqun should pay to equity shareholders for Artforever.com?

//Below are the tables corresponding to my answers for 1 and 2 (Discount rate and relevant cash flows) I just need to be shown how to do the above question.

Calculations			Constants Given
Cost of Debt (COD)	6.20%		Market Rate	8.00%
			30year Treasury Bond Rate	2.50%
Cost of Debt after Tax equals Cost of Debt*(1-Tax Rate)	3.720%		Industry Beta	1.5
			Tax Rate	40%
Cost of Equity (COE)	10.7500%
			D/V	15%
			E/V	85%
Weighted Average Cost of Capital=%equity*COE+%debt*COD	9.695500%
Discount Rate	9.696%

	2017	2018	2019	2020	2021	2022		2017	2018	2019	2020	2021	2022
Revenues	$1,000,000.00	$1,250,000.00	$1,875,000.00	$2,100,000.00	$3,750,000.00		Sales Revenue	$1,000,000.00	$1,250,000.00	$1,875,000.00	$2,100,000.00	$3,750,000.00
Cost of Goods Sold (COGS)	$405,000.00	$495,000.00	$737,500.00	$810,000.00	$1,495,000.00
Equals 42% of Revenue and subtract depreciation							Investment in CAPEX and NWC	$25,000.00	$55,000.00	$170,000.00	$80,000.00	$80,000.00
Selling/General/Administrative (SGA)	$150,000.00	$187,500.00	$281,250.00	$315,000.00	$562,500.00
Equals 15% of Revenue							Depreciation	$15,000.00	$30,000.00	$50,000.00	$72,000.00	$80,000.00
EBITDA=Revenue-COGS-SGA	$445,000.00	$567,500.00	$856,250.00	$975,000.00	$1,692,500.00
							Interest Payments	$94,400.00	$101,400.00	$108,600.00	$115,900.00	$122,400.00
EBITDA(1-tax rate)	$267,000.00	$340,500.00	$513,750.00	$585,000.00	$1,015,500.00
tax rate= 40%
CashFlow to Firm	$162,600.00	$214,100.00	$285,150.00	$461,100.00	$893,100.00	$910,962.00
Equals EBITDA(1-t) - investment in CapEx - Interest Payment + Depreciation
For 2022, growth rate of 2% over 2021

Forecast Data for Artforever.com (in $'000) 2018 Sales Revenue 1,000.0 Investment in CapEx and NWC 25.0 Depreciation 15.0 Interest payments 94.4 2019 1,250.0 55.0 30.0 101.4 2020 1,875.0 170.0 50.0 108.6 2021 2,100.0 80.0 72.0 115.9 2022 3,750.0 80.0 80.0 122.4 Market Data Current yield to maturity on 30 year treasury bonds Current yield to maturity on 3 month treasury bills Most recent 1-year return on the S&P 500 Estimate of expected average return on the S&P 500 over the next 30 years 2.50% 2.0% 5.3% 8.0% Forecast Data for Artforever.com (in $'000) 2018 Sales Revenue 1,000.0 Investment in CapEx and NWC 25.0 Depreciation 15.0 Interest payments 94.4 2019 1,250.0 55.0 30.0 101.4 2020 1,875.0 170.0 50.0 108.6 2021 2,100.0 80.0 72.0 115.9 2022 3,750.0 80.0 80.0 122.4 Market Data Current yield to maturity on 30 year treasury bonds Current yield to maturity on 3 month treasury bills Most recent 1-year return on the S&P 500 Estimate of expected average return on the S&P 500 over the next 30 years 2.50% 2.0% 5.3% 8.0%