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Word Fie Edit Vien Insert Format Tools Table Window Help Mon Nov 1 1:24 PM 1 Problem 5 0 Home Insert Draw Design Layout References Mailings Review View Tell me Share Comments ( 1 Caibri Bo.. 11 . T odloud PAR Cene Aance code AaBb Abbodo AutoC Nag Had 1 Hussing T1 Suboth Sanat Automaty nghang Aadece Iri . Paste re YA X K = Dictate Styles Parc Sonstity Duddy's Home Repair Company Buddy's Home Repair Company, a regional hardware chain, which specializes in do-it-yourself materials and equipment rentals, is cash rich because of several consecutive good years. One of the alternatives uses for the excess funds is an acquisition. Julie Dona, Duddy's treasurer, and your boss has been asked to place a value on a potential target, Dylan's Lighting LL a chain which operates in several adjacent states, and she has enlisted your help. The table -1 below indicates Dona's estimates of LL's earnings potential if it came under Duddy's management (in millions of dollars). The interest expense listed here includes the interest (1) an LL'S existing debt, which is $55 million at a rate of 9 percent, and (2) cn new debt expected to be issued over time to help finance expansion within the new l. division, the code name given to the target firm. If acquired, LL will face a 30 percent tax rate. Table 1 1 2021 2022 2023 2024 21125 ZUZA Net sales 60.00 90.00 1.250 129.36 142.31 Call of du sold (60%) 60% 36,00 54.00 67.50 6T 77.63 85.30 Selling administrative eine 7.50% 4.511 (1.75 8.44 9.00 11.000 Interest expense 5.0001 6.511 6.50 7.0011 8.16 Total Net Operacing Capital 150.00 150.00 157.50 162.50 169.50 173.50 4% Table 2 risk free rate ako Txomium Der het Jaht fuerit in millions Berger de Kg Tox rate 1.3 20% S$5.00 9% | 30% Security analysts estimate Ll's beta to be 1.3. The acquisition would not change Dylari's capital structure, which is 20 percent debt. Dona realizes that Dylan's Lighting's business plan also requires certain levels of operating capital, and that the annual investment could be significant. Dona estimates the risk-free rate to be 4 percent and the market risk premium to be 6 percent. She also estimates that free cash flows after 2026 will grow at a constant rate of 5 percent. Durdy's management is new to the merger game, so Dona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Dona has developed the following questions, which you must answer and then defend to Dudos board. Several reasons have been proposed to justify mergers. Among the more prominent are: Answer the following questions: Page 1 497 ards T* Engish (United States rucu P + 1354, Word Fie Edit Vien Insert Format Tools Table Window Help Mon Nov 1 1:24 PM 1 AROG Problem 5 0 Home Insert Draw Design Layout References Mailings Review View Tell me Share Comments ( Caibri Bo.. 11 VAA = . T Podcuda Auta ANE N: Spuding Aance code AaBb Abbodo Acabo Hashga Star Aadece Irin Paste T1 Surthe AO! IE Charlie X K Dictate Styles Parc Sonstity 1. Assume that Dylan's has 20 million shares outstanding. These shares are traded relatively infrequently, but the last trade, made several weeks ago, was at a price of $11 per share. Should Duddy make an offer for Dylan's? If so, how much should it offer per share? 2. There has been considerable research undertaken to determine whether mergers really create value, and, if so, how this value is shared between the parties involved. What are the results of this research? What method is used to account for mergers? 3. What merger-related activities are undertaken by investment bankers? 4. What is a leveraged buyout (LBO)? What are some of the advantages and disadvantages of going private? Page 2 of 2 487 wurd English St . + 1824, A Word Fie Edit Vien Insert Format Tools Table Window Help Mon Nov 1 1:24 PM 1 Problem 5 0 Home Insert Draw Design Layout References Mailings Review View Tell me Share Comments ( 1 Caibri Bo.. 11 . T odloud PAR Cene Aance code AaBb Abbodo AutoC Nag Had 1 Hussing T1 Suboth Sanat Automaty nghang Aadece Iri . Paste re YA X K = Dictate Styles Parc Sonstity Duddy's Home Repair Company Buddy's Home Repair Company, a regional hardware chain, which specializes in do-it-yourself materials and equipment rentals, is cash rich because of several consecutive good years. One of the alternatives uses for the excess funds is an acquisition. Julie Dona, Duddy's treasurer, and your boss has been asked to place a value on a potential target, Dylan's Lighting LL a chain which operates in several adjacent states, and she has enlisted your help. The table -1 below indicates Dona's estimates of LL's earnings potential if it came under Duddy's management (in millions of dollars). The interest expense listed here includes the interest (1) an LL'S existing debt, which is $55 million at a rate of 9 percent, and (2) cn new debt expected to be issued over time to help finance expansion within the new l. division, the code name given to the target firm. If acquired, LL will face a 30 percent tax rate. Table 1 1 2021 2022 2023 2024 21125 ZUZA Net sales 60.00 90.00 1.250 129.36 142.31 Call of du sold (60%) 60% 36,00 54.00 67.50 6T 77.63 85.30 Selling administrative eine 7.50% 4.511 (1.75 8.44 9.00 11.000 Interest expense 5.0001 6.511 6.50 7.0011 8.16 Total Net Operacing Capital 150.00 150.00 157.50 162.50 169.50 173.50 4% Table 2 risk free rate ako Txomium Der het Jaht fuerit in millions Berger de Kg Tox rate 1.3 20% S$5.00 9% | 30% Security analysts estimate Ll's beta to be 1.3. The acquisition would not change Dylari's capital structure, which is 20 percent debt. Dona realizes that Dylan's Lighting's business plan also requires certain levels of operating capital, and that the annual investment could be significant. Dona estimates the risk-free rate to be 4 percent and the market risk premium to be 6 percent. She also estimates that free cash flows after 2026 will grow at a constant rate of 5 percent. Durdy's management is new to the merger game, so Dona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Dona has developed the following questions, which you must answer and then defend to Dudos board. Several reasons have been proposed to justify mergers. Among the more prominent are: Answer the following questions: Page 1 497 ards T* Engish (United States rucu P + 1354, Word Fie Edit Vien Insert Format Tools Table Window Help Mon Nov 1 1:24 PM 1 AROG Problem 5 0 Home Insert Draw Design Layout References Mailings Review View Tell me Share Comments ( Caibri Bo.. 11 VAA = . T Podcuda Auta ANE N: Spuding Aance code AaBb Abbodo Acabo Hashga Star Aadece Irin Paste T1 Surthe AO! IE Charlie X K Dictate Styles Parc Sonstity 1. Assume that Dylan's has 20 million shares outstanding. These shares are traded relatively infrequently, but the last trade, made several weeks ago, was at a price of $11 per share. Should Duddy make an offer for Dylan's? If so, how much should it offer per share? 2. There has been considerable research undertaken to determine whether mergers really create value, and, if so, how this value is shared between the parties involved. What are the results of this research? What method is used to account for mergers? 3. What merger-related activities are undertaken by investment bankers? 4. What is a leveraged buyout (LBO)? What are some of the advantages and disadvantages of going private? Page 2 of 2 487 wurd English St . + 1824, A