Please do part c only :)
Please do part C and show the steps required to get these answers for part c
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 Government Bond (Hong Kong Exchange Fund) Rates Current rate (December 2008 Historical average Jan 1965-Dec 2008) 30-year bond 6.13% 30-year bond 8.16% 10-year bond 4.37% 10-year bond 6.88% 1-year bond 2.13% 1-year bond 4.08% B. Hang Seng Index Returns Most recent (annualized) return Average market risk premium Final week, 2008 6.43% 2003-2008 3.18% December 2008 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) Revenue Cost of goods sold & other expenses Gross profits Depreciation EBIT Actual 2008 45,210 35,021 10, 189 1.226 8.963 2009 51,539 44,782 6,757 1.438 5,319 Forecast 2010 64,489 48,921 15,568 1,698 13,870 2011 70,287 54,294 15,993 1,755 14,238 Net working capital Fixed assets 4,782 48,234 5,633 57,219 6,456 65,982 7,034 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) 2010 XXX 2009 XXX XXX XXX XXX OCF Net Capital Spending Increase in NWC Free Cash Flow XXX 2011 XXX XXX XXX XXX XXX XXX (c) The following table gives the information on fruit juices industry multiples: Growing firm average Mature firm average EV / EBIT 8.2 6.4 Make the best use of this information and your result obtained in part (b) to re-estimate Huiyuan's equity value per share. Compare these estimates and briefly discuss why some of these estimates are more useful than others. (14 points) (d) Synergies were expected to occur. On the one hand, Huiyuan's revenue would increase due to a brand-name effect from Coca-Cola. The incremental increase of revenue is predicted to be $1,600 million in the first year after acquisition, which would grow at 6% permanently. On the other hand, Coca-Cola expected to incur some restructuring costs that were associated with its existing investments in China for its intended entry to China's fruit juices market. The restructuring costs were expected to be $4,700 million in 2009 and $1,800 million in 2010, net of tax effects. The appropriate discount rate for the synergy cash flows was 11.5% for Huiyuan and 9.5% for Coca-Cola. Determine the total value of synergies. If the stand-alone value of equity is approximately $35,000 million, what is Huiyuan's stock value per share by including all synergy effects? (12 points) Question 1 (a) With D/E=1.5 changing to 0.6, the re-levered beta is 1.4329 Rf=6.13%, MRP=7.8% ke-17.31% With kp=8.7%, then WACC=13.26% (b) 2 OCF. Capital expenditure NWC investment Free cash flow 5,427 10,423 851 -5.847 12,101 10,461 823 817 3 12,434 6,626 578 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 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) 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 share 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 Government Bond (Hong Kong Exchange Fund) Rates Current rate (December 2008 Historical average Jan 1965-Dec 2008) 30-year bond 6.13% 30-year bond 8.16% 10-year bond 4.37% 10-year bond 6.88% 1-year bond 2.13% 1-year bond 4.08% B. Hang Seng Index Returns Most recent (annualized) return Average market risk premium Final week, 2008 6.43% 2003-2008 3.18% December 2008 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) Revenue Cost of goods sold & other expenses Gross profits Depreciation EBIT Actual 2008 45,210 35,021 10, 189 1.226 8.963 2009 51,539 44,782 6,757 1.438 5,319 Forecast 2010 64,489 48,921 15,568 1,698 13,870 2011 70,287 54,294 15,993 1,755 14,238 Net working capital Fixed assets 4,782 48,234 5,633 57,219 6,456 65,982 7,034 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) 2010 XXX 2009 XXX XXX XXX XXX OCF Net Capital Spending Increase in NWC Free Cash Flow XXX 2011 XXX XXX XXX XXX XXX XXX (c) The following table gives the information on fruit juices industry multiples: Growing firm average Mature firm average EV / EBIT 8.2 6.4 Make the best use of this information and your result obtained in part (b) to re-estimate Huiyuan's equity value per share. Compare these estimates and briefly discuss why some of these estimates are more useful than others. (14 points) (d) Synergies were expected to occur. On the one hand, Huiyuan's revenue would increase due to a brand-name effect from Coca-Cola. The incremental increase of revenue is predicted to be $1,600 million in the first year after acquisition, which would grow at 6% permanently. On the other hand, Coca-Cola expected to incur some restructuring costs that were associated with its existing investments in China for its intended entry to China's fruit juices market. The restructuring costs were expected to be $4,700 million in 2009 and $1,800 million in 2010, net of tax effects. The appropriate discount rate for the synergy cash flows was 11.5% for Huiyuan and 9.5% for Coca-Cola. Determine the total value of synergies. If the stand-alone value of equity is approximately $35,000 million, what is Huiyuan's stock value per share by including all synergy effects? (12 points) Question 1 (a) With D/E=1.5 changing to 0.6, the re-levered beta is 1.4329 Rf=6.13%, MRP=7.8% ke-17.31% With kp=8.7%, then WACC=13.26% (b) 2 OCF. Capital expenditure NWC investment Free cash flow 5,427 10,423 851 -5.847 12,101 10,461 823 817 3 12,434 6,626 578 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 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) 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 share
