On 4th January 2021, Ace Cascade Quyere Corp (ACQ) made an acquisition bid of $135 per share for all of Tesen Aqua Refinery Inc (TAR)s equity. Analysts forecast TARs income statement and balance sheet to be as follows. Year denotes the years ending 31st December.

(in thousand $) Actual 2020 Projected 2021 2022 Steady 2023 Year Sales Costs Depreciation EBIT Interests and taxes Net income 2600 2000 80 520 60 460 3100 2400 100 600 70 530 3700 2800 150 750 80 670 4400 3200 200 1000 90 910 Current assets Gross fixed assets Accumulated depreciation Net fixed assets Total assets 80 2000 500 1500 1580 160 2200 600 1600 1760 170 2450 750 1700 1870 190 2850 950 1900 2090 Current liabilities Long term debt Shareholders equity Total liabilities and equity 0 600 980 1580 20 660 1080 1760 40 670 1160 1870 50 680 1360 2090 Other information for TAR as of 5th December 2020 Market value of debt (in thousand $) Common stock price Common shares outstanding (in thousand shares) Marginal tax rate 600 $100 per share 40 40% Analysts forecast that starting from 2023, 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 have been struggling in choosing an appropriate method to arrive at a reliable beta for TAR. To estimate beta, they found from recent stock return analyses that: the variance of TAR's returns is 0.8100, the variance of the market returns is 0.0144, and the correlation coefficient between TAR and the market returns is 0.8000. Analysts also identify the three following firms that they believe to be appropriate comparable firms. If they were to rely on these comparable firms, analysts would use the mean (average) beta of these comparable firms to value ACQ. They also assume that neither ACQ nor these comparable firms have a significant amount of cash to be adjusted when calculating beta or firm value. Comparable firm Perl Halones Inc Transri Sys Inc Zyntesus Corp Beta (from Bloomberg) 1.4000 1.3920 1.2535 Debt / Equity ratio 0.2000 0.2500 0.1500 Marginal tax rate 40% 36% 40% Analysts examine TAR's current outstanding debt and price all debt into a comparable set of zero coupon bonds that mature in 20 years and sell for $376.8895 each. The par value is $1000 and the compounding frequency is annual. Capital market information: Maturity Treasury Yield 1 year 1.36% 10 years 3.36% Market Risk Premium 7.00% 5.00% 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). Effective date Dec 28, 2019 Sep 22, 2019 Aug 15, 2019 Mar 20, 2019 Feb 16, 2019 Acquirer Northern Stax CWX Inc Blue Pedals Ghearn Corp Daepo Ind Target Restoration Inc Cat Industries Bullow Spacks Vatraoi Mains Unland Waste Enterprise Value / EBITDA 10.60 8.20 9.00 12.00 10.20 Acquisition Premium 33% 36% 20% 38% 40% How much should each of TAR's share of common equity be worth using each of the three following valuation methods: (1) the discounted cash flow method, (2) the valuation multiple method, and (3) the comparable transaction method? Please write all $ figures in thousands, except for per share data. (35 marks) (in thousand $) Actual 2020 Projected 2021 2022 Steady 2023 Year Sales Costs Depreciation EBIT Interests and taxes Net income 2600 2000 80 520 60 460 3100 2400 100 600 70 530 3700 2800 150 750 80 670 4400 3200 200 1000 90 910 Current assets Gross fixed assets Accumulated depreciation Net fixed assets Total assets 80 2000 500 1500 1580 160 2200 600 1600 1760 170 2450 750 1700 1870 190 2850 950 1900 2090 Current liabilities Long term debt Shareholders equity Total liabilities and equity 0 600 980 1580 20 660 1080 1760 40 670 1160 1870 50 680 1360 2090 Other information for TAR as of 5th December 2020 Market value of debt (in thousand $) Common stock price Common shares outstanding (in thousand shares) Marginal tax rate 600 $100 per share 40 40% Analysts forecast that starting from 2023, 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 have been struggling in choosing an appropriate method to arrive at a reliable beta for TAR. To estimate beta, they found from recent stock return analyses that: the variance of TAR's returns is 0.8100, the variance of the market returns is 0.0144, and the correlation coefficient between TAR and the market returns is 0.8000. Analysts also identify the three following firms that they believe to be appropriate comparable firms. If they were to rely on these comparable firms, analysts would use the mean (average) beta of these comparable firms to value ACQ. They also assume that neither ACQ nor these comparable firms have a significant amount of cash to be adjusted when calculating beta or firm value. Comparable firm Perl Halones Inc Transri Sys Inc Zyntesus Corp Beta (from Bloomberg) 1.4000 1.3920 1.2535 Debt / Equity ratio 0.2000 0.2500 0.1500 Marginal tax rate 40% 36% 40% Analysts examine TAR's current outstanding debt and price all debt into a comparable set of zero coupon bonds that mature in 20 years and sell for $376.8895 each. The par value is $1000 and the compounding frequency is annual. Capital market information: Maturity Treasury Yield 1 year 1.36% 10 years 3.36% Market Risk Premium 7.00% 5.00% 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). Effective date Dec 28, 2019 Sep 22, 2019 Aug 15, 2019 Mar 20, 2019 Feb 16, 2019 Acquirer Northern Stax CWX Inc Blue Pedals Ghearn Corp Daepo Ind Target Restoration Inc Cat Industries Bullow Spacks Vatraoi Mains Unland Waste Enterprise Value / EBITDA 10.60 8.20 9.00 12.00 10.20 Acquisition Premium 33% 36% 20% 38% 40% How much should each of TAR's share of common equity be worth using each of the three following valuation methods: (1) the discounted cash flow method, (2) the valuation multiple method, and (3) the comparable transaction method? Please write all $ figures in thousands, except for per share data. (35 marks)