Pampa RV, Inc is considering the acquisition of Chico Clothing Company (CCC) for a price of $12 per share Pampas has 500,000 shares of common stock outstanding, currently trading at $9 75 per share The book value of the common stock is $5 per share Pampa also has bonds with a market value of $3,500,000 and a yield to maturity of 3 4 Based on current market valuations, Pampa is currently achieving its target debt to equity ratio Pampas equity beta is 0 80 CCCs cost of goods sold (COGS) is expected to be 38 of sales revenues, and selling, general and administrative (SG A) expenses are expected to be 12 of revenues The firm is 100 equity financed and has 100,000 shares of common stock outstanding Its equity beta is estimated to be 1 353 CCC has experienced rapid growth over the last ten years However, your analysis of industry structure suggests that competition in the beauty pageant clothing and accessories market is likely to increase in the next few years Thus, you forecast that the perpetual growth rate for free cash flows after five years will be a modest 1 5 per year The corporate tax rate is 40 for all firms Table 1 Forecast Data for Chico Clothing Company Year Year 1 Year 2 Year 3 Year 4 Year 5 Sales Revenue 300,000 335,000 375,000 410,000 575,000 Investment in CapEx and NWC 18,000 25,000 40,000 50,000 65,000 15,000 30,000 40,000 52,000 60,000 Depreciation Table 2 Market Data Current yield to maturity on 30 year treasury bonds 2 50 Estimate of expected average return on the S P 500 over the next 30 years 7 50 1) What is the value of Chico Clothing Company Assume that your valuation is performed today at Year 0, and that the revenues shown in Table 1 are end of year year forecasts 2) Suppose Pampa RV offers to pay $12 for each of CCCs outstanding shares If the market fully impounds this information, what will be the new price per share of Pampas common stock 3) What is the most that Pampa should pay for CCC Why 4) Estimate the beta of the combined entity (Pampa CCC) after the merger Based on your answer, will the merged firms cost of capital to be higher or lower than Pampas current cost of capital Explain your answer Hint Firm beta is a value weighted average of individual betas

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Pampa RV, Inc. is considering the acquisition of Chico Clothing Company (CCC) for a price of $12 per share. Pampas has 500,000 shares of common

Pampa RV, Inc. is considering the acquisition of Chico Clothing Company (CCC) for a price of $12 per share. Pampas has 500,000 shares of common stock outstanding, currently trading at $9.75 per share. The book value of the common stock is $5 per share. Pampa also has bonds with a market value of $3,500,000 and a yield to maturity of 3.4%. Based on current market valuations, Pampa is currently achieving its target debt to equity ratio. Pampas equity beta is 0.80.

CCCs cost of goods sold (COGS) is expected to be 38% of sales revenues, and selling, general and administrative (SG&A) expenses are expected to be 12% of revenues. The firm is 100% equity financed and has 100,000 shares of common stock outstanding. Its equity beta is estimated to be 1.353.

CCC has experienced rapid growth over the last ten years. However, your analysis of industry structure suggests that competition in the beauty pageant clothing and accessories market is likely to increase in the next few years. Thus, you forecast that the perpetual growth rate for free cash flows after five years will be a modest 1.5% per year. The corporate tax rate is 40% for all firms.

Table 1: Forecast Data for Chico Clothing Company Year
	Year 1	Year 2	Year 3	Year 4	Year 5
Sales Revenue	300,000	335,000	375,000	410,000	575,000
Investment in CapEx and NWC	18,000	25,000	40,000	50,000	65,000
	15,000	30,000	40,000	52,000	60,000
Depreciation

Table 2 Market Data Current yield to maturity on 30 year treasury bonds	2.50%
Estimate of expected average return on the S&P 500 over the next 30 years	7.50%

1) What is the value of Chico Clothing Company? Assume that your valuation is performed today at Year 0, and that the revenues shown in Table 1 are end-of-year year forecasts.

2) Suppose Pampa RV offers to pay $12 for each of CCCs outstanding shares. If the market fully impounds this information, what will be the new price per share of Pampas common stock?

3) What is the most that Pampa should pay for CCC? Why?

4) Estimate the beta of the combined entity (Pampa + CCC) after the merger. Based on your answer, will the merged firms cost of capital to be higher or lower than Pampas current cost of capital? Explain your answer. Hint: Firm beta is a value-weighted average of individual betas.