Please see attachment for assistance with finance homework.

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 and NWC 25.0 55.0 Depreciation 15.0 30.0 Interest payments 94.4 101.4 2019 1,875.0 170.0 50.0 108.6 2020 2,100.0 80.0 72.0 115.9 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 2021 3,750.0 80.0 80.0 122.4 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 Current yield to maturity on 3 month treasury bills Most recent 1-year return on the S&P 500 Estimate of expected average return on the S&P 500 over the next 30 years 2.50% 2.0% 5.3% 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. 1. What discount rate is appropriate for finding the value of Artforever.com? Write a few paragraphs giving your answer and clearly explaining your reasoning and computations; show detailed computations in your Excel spreadsheet labeled Exhibit 1. 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. Write a few paragraphs giving your answer and clearly explaining your reasoning and computations; show detailed computations in your Excel spreadsheet labeled Exhibit 2. 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? Write a few paragraphs giving your answer and clearly explaining your reasoning and computations; show detailed computations in your Excel spreadsheet labeled Exhibit 3. 4. Under what conditions might you consider recommending that management make a higher offer than your recommended price in (3) above? No computations are necessary, just a short discussion. Your report is intended for the senior management of Neuqun, Inc., so be sure that you write in a professional style that is easy to follow. 1 Student's Name Institutional Affiliation 2 1. In attaining a discounting rate, the rate at which the bond yields, is divided by one, as per the number of periods the bond will take to mature. This facilitates determination of the amount payable per period, in the future hence facilitating planning and allocation of the amount to settle the liability at hand. Therefore, by dividing the cost of borrowing (6.2%) by one, you get the discounting rate for period 1. 2. To estimate the cash flows in the given periods, the difference between the revenues and expenses per period is attained; considering the corporate tax rate as well. The value is then discounted to get the present values of the net cash flows. 3. Neuqun will pay the equity shareholders of Artforever.com a maximum of $1685339.385 the amount that will enable them settle their debts (bond payment) yet still have a positive net present value in their flow of cash. This works well for the benefit of the company and also suits the acquirer as well. 4. On acquiring a firm, all the benefits associated with the firm flow to your entity as well as its problems; this is inclusive of bonds and any other outstanding liabilities that the firm has at the time. By acquiring, Artforever.com, Neuqun gains a higher market, share; by taking that which is already held by Artforever.com. However, when competition starts taking effect, then it shall have to device new strategies to remain in the market. On the other hand, the shareholders of Artforever.com require a good offer before making an acceptance; the premium offered therefore may make the price shift in favor of Artforever.com, making Neuqun pay more to acquire the company. N.B After the acquisition of the company, Neuqun will now use the information of the competitor; ArtToday, in formulating its strategies given that they will all be trading publicly. As 3 opposed to comparing the viability of Neuqun's acquisition between the private company (Artforever) and the publicly trading company (ArtToday), but upon acquisition, comparing the two is quite logical. Exhibit 1 value of the bond Maturity period coupon rate cost of borrowing dioscounting rate exhibit 2 year sales revenue cost of sales selling, general&adm expenses depreciation Investment in CapEx and NWC interest payment total expenses cashflow corporate tax net cashflow exhibit 3 net cashflows discounting rate discounted cashflows total expected flow of cash 1475000 5 years 7% 6.20% 0.9416195857 2017 1000000 420000 150000 15000 25000 94400 704400 295600 118240 177360 2018 1250000 525000 187500 30000 55000 101000 898500 351500 140600 210900 2019 1875000 787500 281250 50000 170000 108600 1397350 477650 191060 286590 177360 0.9416 167002.176 210900 0.8866 186983.94 286590 0.8349 239273.991 2020 2100000 882000 315000 72000 80000 115900 1464900 635100 254040 381060 2021 3750000 1575000 562500 80000 80000 122400 2419900 1330100 532040 798060 381060 0.7861 299551.266 798060 0.7402 590724.012 1483535.385 1 Student's Name Institutional Affiliation 2 1. In attaining a discounting rate, the rate at which the bond yields, is divided by one, as per the number of periods the bond will take to mature. This facilitates determination of the amount payable per period, in the future hence facilitating planning and allocation of the amount to settle the liability at hand. Therefore, by dividing the cost of borrowing (6.2%) by one, you get the discounting rate for period 1. 2. To estimate the cash flows in the given periods, the difference between the revenues and expenses per period is attained; considering the corporate tax rate as well. The value is then discounted to get the present values of the net cash flows. 3. Neuqun will pay the equity shareholders of Artforever.com a maximum of $1685339.385 the amount that will enable them settle their debts (bond payment) yet still have a positive net present value in their flow of cash. This works well for the benefit of the company and also suits the acquirer as well. 4. On acquiring a firm, all the benefits associated with the firm flow to your entity as well as its problems; this is inclusive of bonds and any other outstanding liabilities that the firm has at the time. By acquiring, Artforever.com, Neuqun gains a higher market, share; by taking that which is already held by Artforever.com. However, when competition starts taking effect, then it shall have to device new strategies to remain in the market. On the other hand, the shareholders of Artforever.com require a good offer before making an acceptance; the premium offered therefore may make the price shift in favor of Artforever.com, making Neuqun pay more to acquire the company. N.B After the acquisition of the company, Neuqun will now use the information of the competitor; ArtToday, in formulating its strategies given that they will all be trading publicly. As 3 opposed to comparing the viability of Neuqun's acquisition between the private company (Artforever) and the publicly trading company (ArtToday), but upon acquisition, comparing the two is quite logical. Exhibit 1 value of the bond Maturity period coupon rate cost of borrowing dioscounting rate exhibit 2 year sales revenue cost of sales selling, general&adm expenses depreciation Investment in CapEx and NWC interest payment total expenses cashflow corporate tax net cashflow exhibit 3 net cashflows discounting rate discounted cashflows total expected flow of cash 1475000 5 years 7% 6.20% 0.9416195857 2017 1000000 420000 150000 15000 25000 94400 704400 295600 118240 177360 2018 1250000 525000 187500 30000 55000 101000 898500 351500 140600 210900 2019 1875000 787500 281250 50000 170000 108600 1397350 477650 191060 286590 177360 0.9416 167002.176 210900 0.8866 186983.94 286590 0.8349 239273.991 2020 2100000 882000 315000 72000 80000 115900 1464900 635100 254040 381060 2021 3750000 1575000 562500 80000 80000 122400 2419900 1330100 532040 798060 381060 0.7861 299551.266 798060 0.7402 590724.012 1483535.385