Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Please do part b only. please show the steps in order to get these answers for part b: Question 1 On 3 September 2008, Coca-Cola
Please do part b only. please show the steps in order to get these answers for part b:
Question 1 On 3 September 2008, Coca-Cola Company offered to buy China's largest fruit juice company, China Huiyuan Juice Group Limited. In early January 2009, the chief financial officer (CFO) of Huiyuan, Mr. Francis Ng, was evaluating his company and preparing for the negotiation with Coca-Cola for a possible deal Huiyuan had been listed on Hong Kong Stock Exchange since February 2007. At the fiscal year end on 31 December 2008, Huiyuan had 4,267 million shares outstanding and was trading at HK$4.20 per share on Hong Kong Stock Exchange. Fruit juice companies in China similar to Huiyuan typically had an equity beta of 2.1 and debt-to-equity ratio of 1.5 (a) Huiyuan had a target debt-to-equity ratio of 0.6. The yield on Huiyuan's long-term debt had stabilized for years at 8.7%. The corporate tax rate was 25%. Table 1.1 provides information on Hong Kong capital market. Determine the cost of capital for Huiyuan. (7 points) Table 1.1 Hong Kong Capital Market Information A. HK Govenment Bond (Hong Kong Exchange Fund) Rates Current rate (December 2008) Historical average (Jan 1965-Dec 2008) 30-year bond 10-year bond 1-year bond 6.13% 30-year bond 10-year bond 1-year bond 8.16% 4.37% 6.88% 2.13% 4.08% B. Hang Seng Index Returns Most recent (annualized) return Average market risk premium Final week, 2008 December 2008 6.43% 2003-2008 3.18% 4.69% 1997-2008 1.27% Whole year, 2008 2.13% 1965-2008 7.80% (b) The financial forecast for Huiyuan is given in Table 1.2 Table 1.2 Financial Forecast for Huiyuan December 31, 2008 through December 31, 2011 (dollar figures in millions) Actuai Forecast 2008 2009 2010 2011 Revenue 45,210 51,539 64,489 70,287 Cost of goods sold & other expenses Gross profits Depreciation 35,021 44,782 48,921 15,568 54,294 15,993 10,189 6,757 1,226 1.438 5,319 1,698 13,870 1,755 14,238 T 8,963 Net working capital 4,782 48,234 5,633 6,456 65,982 7,034 Fixed assets 57,219 70,853 Determine Huiyuan's free cash flows for the forecast years, 2009-2011. Use a table as below to summarize your result. Huiyuan's balance sheet showed that it had short-term debt of $1,897 million, long-term debt of $25,529 million, and shareholder equity of $28.335 million. Suppose that the terminal value is $74,200. What is the stand-alone value of Huiyuan (which had little non-operating assets)? What is the value of its equity per share? (15 points) 2009 2010 2011 CF XXX XXX XX Net Capital Spending XX XXX XXX Increase in NWC XXx XXX XXX Free Cash Flow XX XX XXX Question 1 () With D/E 1.5 changing to 0.6, the re-levered beta is 1.4329 Rr 6.13%, MRP-7.8%ke - 17.31% With kp-8.7%, then WACC=13.26 % (b) 0 1 2 3 CF 5,427 10,423 12,101 12,434 6,626 Capital expenditure NWC investment 10,461 851 823 578 Free cash flow -5,847 817 5,230 Terminal value: 74,200 Enterprise value (which is the stand-alone value): 50,139 Value of debt: 27,426 Value of equity per share: 5.32 (c) Value of forecast period CFs: -927 Present value estimates: 10.80 (from growing firms); 7.02 (from mature firms) Terminal-value approach: 12.19 (from growing firms); 8.05 (from mature firms) (d) Synergy value of cost savings (at 11.5%): 21,818 (negative) Synergy effect of restructuring cost (at 9.5%): -5,793 Equity value from DCF (given): 35,000 Equity value with synergies: 51,025 or 11.96 per shareStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started