Please assist with assignment. Attached is the information sheet and my excel calculations. Please validate that the answers for Questions 1-3 and assist with answering question 4.

1. What discount rate is appropriate for finding the value of Artforever.com?

2. What are the relevant cash flows for valuing Artforever.com? Assume that your

valuation is performed at the end of 2016, and that the values shown in Table 1 are

end-of-year forecasts.

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?

4. Under what conditions might you consider recommending that management make a

higher offer than your recommended price in (3) above?

Thanks.

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. Neuqun's 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 Artforever's financial performance and industry structure, you gathered the data shown in Table 1 below. Forecast Data for Artforever.com (in $'000) 2017 2018 Sales Revenue 1,000.0 1,250.0 Investment in CapEx 25.0 55.0 and NWC Depreciation 15.0 30.0 Interest payments 94.4 101.4 2019 1,875.0 170.0 2020 2,100.0 80.0 2021 3,750.0 80.0 50.0 108.6 72.0 115.9 80.0 122.4 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 firm's 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 2021 will be a more modest 2.0% per year. Your analysis of market data yielded the information in Table 2 below. Market Data Current yield to maturity on 30 year treasury bonds 2.50% Current yield to maturity on 3 month treasury bills 2.0% Most recent 1-year return on the S&P 500 5.3% Estimate of expected average return on the S&P 500 over the next 30 years 8.0% Your analysis of Artforever.com's 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 ArtToday's 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. Neuquen Inc. Shares Outstanding Current Market Price per share Book value Market value of bonds Yield to Maturity (YTM) 100000 50 20 2000000 6.20% Debt to Equity Ratio = .75 1475000 / Equity = .75 Equity = 1475000 / .75 Total Capital = Equity + L Artforever.com Long term debt Coupon rate COGS SG&A Corporate tax Cost of borrowing Target debt to value ratio Perpetual growth rate Market Data Current YTM on 30 year treasury bonds Current YTM on 3 month treasury bills Most 1-year return on S&P 500 Estimate expected average return on S&P 500 over the next 30 years 1475000 7% 42% 15% 40% 6.2% 15% 2% Risk Free rate of return Expected avg return on S Beta = 1.5 2.5% 2% 5.3% 8% Weight of Debt in Total C ArtToday.net Target debt to value ratio Beta Common shares Current Market Price per share Corporate tax 7.5% 1.5 50000 12 40% Cost of Equity = Risk free Weight of Owners Equity Weight Avg Cost of Capit WACC Debt to Equity Ratio = .75 1475000 / Equity = .75 Equity = 1475000 / .75 1966667 (of ArtToday.Net) Total Capital = Equity + Long Term Debt 1966667 + 1475000 = 3441667 Risk Free rate of return = 2% Expected avg return on S&P = 8% Beta = 1.5 Cost of Equity = Risk free rate + (market return - risk free rate) * Beta = 2% + (8%-2%) *1.5 11% Weight of Owners Equity in Total Capital 1966667 / 3441667 0.571429 57.14% Weight of Debt in Total Capital 1 - 0.428571 42.86% 0.571429 Weight Avg Cost of Capital (WACC) = (Weight of Equity * Cost of Equity) + (Weight of Debt * Cost of Debt) * 1-.40) r= 0.571429 11% 0.428571 6.2% 0.6 0.0788 7.88% Neuquen Inc. Shares Outstanding 100000 50 20 2000000 6.20% Current Market Price per share Book value Market value of bonds Yield to Maturity (YTM) Artforever.com Long term debt 1475000 7% 42% 15% 40% 6.2% 15% 2% Coupon rate COGS SG&A Corporate tax Cost of borrowing Target debt to value ratio Perpetual growth rate Market Data Current YTM on 30 year treasury bonds Current YTM on 3 month treasury bills Most 1-year return on S&P 500 Estimate expected average return on S&P 500 over the next 30 years 2.5% 2% 5.3% 8% ArtToday.net Target debt to value ratio Beta Common shares Current Market Price per share Corporate tax Sales Revenue COGS (42% of sales) includes depreciation SG&A (15%) Interest Payment EBIT Taxes (40%) Net Income Depreciation OCF Capital Spending & NWC Cash Flow 7.5% 1.5 50000 12 40% Cash Flow Calculations 2017 1000000 420000 150000 94400 335600 134240 201360 15000 216360 25000 191360 WACC r= 7.88% ow Calculations 2018 1250000 525000 187500 101400 436100 174440 261660 30000 291660 55000 236660 2019 1875000 787500 281250 108600 697650 279060 418590 50000 468590 170000 298590 2020 2100000 882000 315000 115900 787100 314840 472260 72000 544260 80000 464260 2021 3750000 1575000 562500 122400 1490100 596040 894060 80000 974060 80000 894060 Neuquen Inc. Shares Outstanding 100000 50 20 2000000 6.20% Current Market Price per share Book value Market value of bonds Yield to Maturity (YTM) Artforever.com Long term debt 1475000 7% 42% 15% 40% 6.2% 15% 2% Coupon rate COGS SG&A Corporate tax Cost of borrowing Target debt to value ratio Perpetual growth rate Market Data Current YTM on 30 year treasury bonds Current YTM on 3 month treasury bills Most 1-year return on S&P 500 Estimate expected average return on S&P 500 over the next 30 years 2.5% 2% 5.3% 8% ArtToday.net Target debt to value ratio Beta Common shares Current Market Price per share Corporate tax Sales Revenue COGS (42% of sales) includes depreciation SG&A (15%) Interest Payment EBIT Taxes (40%) Net Income Depreciation OCF Capital Spending & NWC Cash Flow For 2022 Cash Flow , = 846060 *1.02 (2% perpetual growth) = PV of perpetual flow in 2022 = 2022 Cash Flow / WACC 7.5% 1.5 50000 12 40% Cash Flow Calculations 2017 1000000 420000 150000 94400 335600 134240 201360 15000 216360 25000 191360 177382.28 911941.20 11572857.87 2018 1250000 525000 187500 101400 436100 174440 261660 30000 291660 55000 236660 203349.44 WACC 2019 1875000 787500 281250 108600 697650 279060 418590 50000 468590 170000 298590 237822.23 r= 7.88% 2020 2100000 882000 315000 115900 787100 314840 472260 72000 544260 80000 464260 342765.83 2021 2022 3750000 1575000 562500 122400 1490100 596040 894060 80000 974060 80000 894060 11572857.8680203 611873.97 7920196.02 9493389.76 Max Value payable Max Value payable