Please solve it as soon as possible.

exhibit 2 and 3

Colles XCIO DE Your company (Warrior) wishes to purchase another company (Ace). You are to determine the following: 1. What are the annual cash outlays if the acquisition is completed using using debt as well as what is the annual cash outlay if equity was used to finance the deal? 2. Several financing decisions will be presented by board members, you are to respond to three. You must respond to board member #1 and Board member #2 and then choose your between board member M3 or board member 4 below. Your responses should be explained utilizing financial analysis and financial decision making suggestions include: WACC. NPV, key financial ratios, tax consideration, etc. 3. Make a recommendation as to how the acquisition should be financed taking into account income and risk Facts: Warrior board has adhered to a consistent policy of avoiding long-term debt. As of 2012. the capital structure consisted of common stock, with no interest bearing debt. Warrior management held 79% of the common stock. The remaining shares were widely distributed and traded infrequently in the over the counter market. Ace is a well-run business with a strong management team that had consistently produced 12-13% operating margins every year for the past 10 years. The company was privately held and had no long term debt. The owners were looking for an exit. The two companies agreed to an acquisition price of $125 million. Warrior management felt this was fair. Ace also agreed that it would accept up to 25% of the purchase price in Warrior stock. Warrior Board options: Warrior board chair determined the purchase would require external financing. An investment bank indicated that new common stock could be issued at $17.75 per share, net of underwriting fees and expenses. Net proceeds to Warrior would be $16.67 per share. An issuance of 7.5 million shares would be required for Acel Because Warrior stock had poor performance over the last few years (See Exhibit the Vice President of the Board determined that the company could sell $125 million in bonds to a New York Insurance company. The annual interest rate would be 6.5% and they would mature in 15 years. Annual principal repayments of $6.25 million would be required leaving $37.5 million outstanding at maturity. Because the interest payments on the bond would be tax deductible, the VP felt that issuing debt was the most economically attractive option Board member #1: Stock is clearly the way to go as it has a lower cost. The principayments on the band mean we have an XCUU Board member #1: Stock is clearly the way to go as it has a lower cost. The principal repayments on the bond mean we have an additional $6.25 million cash outlay every year. That is over 9% of the bond issue. With all our long-term leases (See exhibit 2) Warrior already has significant financial commitments. Assuming this debt burden will increase risk and will lead to wild swings in the stock price. Board member #2: With earnings before interest and taxes of $24 million, Ace will generate over $15 million each year after taxes. With an additional 7.5 million shares sold to finance this and dividends of $1.00 per share that comes to $7.5 million annually. It is obvious the bond issue is a bad idea! Board member #3: We should not issue new common stock. We need to be measured in terms of earning sper share (EPS). rather than book or replacement value. The EBIT of the combined companies would be $66 million. Issuing common stock would dilute EPS to $1.91. Using debt, on the other hand, could bump the EPS up to $2.51. (See Exhibit 3) That makes this the right choice for shareholders. Board member #4: All other companies rely on long-term debt in their capital structures. Warrior balance sheet is unusual in this industry and I do not know if our policy against debt is justified. Other similar companies have debt to equity ratios of 0.6 to 1.5 Exhibit 1 Dividends Per Share 0.85 0.90 2006 2007 2008 2009 2010 2011 2012E Operating Revenue 325,088 349,556 371,868 379,457 383,223 395,440 410,223 Income Before Taxes 32,509 35,655 33,097 35,290 38,002 40,539 42,121 Income After Taxes 21,456 23,899 21,54E 22,903 24,853 26,350 27,375 Earnings Per Share 1.43 1.59 1.44 1.53 1.66 1.76 1.83 Market Prices Per Share High Low 17.03 15.50 17.71 16.51 14.70 11.91 16.56 14.65 18.80 16.90 21.20 17.55 Exhibit 2 |- XCIO DE 2011 S 27,330 8741 7,488 83.99 Cash Atents rezivable Prepaid expenses Current Assets Net operating property Goodwill Other assets Total Assets 5243 101,423 42.656 36,998 Accounts payable Miscellaneous payables and accruals Current portion, capital lease Current liabilities Capital lenses Common stock Paid-in surplus Retained earings Long-term liabilities and equity Total liabilities and stockholders equity 146,257 $23.295 65.390 7.1961 FEIT = 524.35M Stock 24.350 BATT Interest, 1 year Earnings before tax The Aderax earning 24,350 Bonds 24,350 8,125 1625 5,679 10,546 15.0 $ 070 EBIT = $66.0M Bonds Stock 66,000 66,000 9.1225 57,875 66,000 20,256 23,100 37.619 42,900 ISO 22.5 1.91 Exhibit 3 5 Shares outstanding (millions) Ernis per share Annual principal repayments 0.70 5 6,250 6,250 Colles XCIO DE Your company (Warrior) wishes to purchase another company (Ace). You are to determine the following: 1. What are the annual cash outlays if the acquisition is completed using using debt as well as what is the annual cash outlay if equity was used to finance the deal? 2. Several financing decisions will be presented by board members, you are to respond to three. You must respond to board member #1 and Board member #2 and then choose your between board member M3 or board member 4 below. Your responses should be explained utilizing financial analysis and financial decision making suggestions include: WACC. NPV, key financial ratios, tax consideration, etc. 3. Make a recommendation as to how the acquisition should be financed taking into account income and risk Facts: Warrior board has adhered to a consistent policy of avoiding long-term debt. As of 2012. the capital structure consisted of common stock, with no interest bearing debt. Warrior management held 79% of the common stock. The remaining shares were widely distributed and traded infrequently in the over the counter market. Ace is a well-run business with a strong management team that had consistently produced 12-13% operating margins every year for the past 10 years. The company was privately held and had no long term debt. The owners were looking for an exit. The two companies agreed to an acquisition price of $125 million. Warrior management felt this was fair. Ace also agreed that it would accept up to 25% of the purchase price in Warrior stock. Warrior Board options: Warrior board chair determined the purchase would require external financing. An investment bank indicated that new common stock could be issued at $17.75 per share, net of underwriting fees and expenses. Net proceeds to Warrior would be $16.67 per share. An issuance of 7.5 million shares would be required for Acel Because Warrior stock had poor performance over the last few years (See Exhibit the Vice President of the Board determined that the company could sell $125 million in bonds to a New York Insurance company. The annual interest rate would be 6.5% and they would mature in 15 years. Annual principal repayments of $6.25 million would be required leaving $37.5 million outstanding at maturity. Because the interest payments on the bond would be tax deductible, the VP felt that issuing debt was the most economically attractive option Board member #1: Stock is clearly the way to go as it has a lower cost. The principayments on the band mean we have an XCUU Board member #1: Stock is clearly the way to go as it has a lower cost. The principal repayments on the bond mean we have an additional $6.25 million cash outlay every year. That is over 9% of the bond issue. With all our long-term leases (See exhibit 2) Warrior already has significant financial commitments. Assuming this debt burden will increase risk and will lead to wild swings in the stock price. Board member #2: With earnings before interest and taxes of $24 million, Ace will generate over $15 million each year after taxes. With an additional 7.5 million shares sold to finance this and dividends of $1.00 per share that comes to $7.5 million annually. It is obvious the bond issue is a bad idea! Board member #3: We should not issue new common stock. We need to be measured in terms of earning sper share (EPS). rather than book or replacement value. The EBIT of the combined companies would be $66 million. Issuing common stock would dilute EPS to $1.91. Using debt, on the other hand, could bump the EPS up to $2.51. (See Exhibit 3) That makes this the right choice for shareholders. Board member #4: All other companies rely on long-term debt in their capital structures. Warrior balance sheet is unusual in this industry and I do not know if our policy against debt is justified. Other similar companies have debt to equity ratios of 0.6 to 1.5 Exhibit 1 Dividends Per Share 0.85 0.90 2006 2007 2008 2009 2010 2011 2012E Operating Revenue 325,088 349,556 371,868 379,457 383,223 395,440 410,223 Income Before Taxes 32,509 35,655 33,097 35,290 38,002 40,539 42,121 Income After Taxes 21,456 23,899 21,54E 22,903 24,853 26,350 27,375 Earnings Per Share 1.43 1.59 1.44 1.53 1.66 1.76 1.83 Market Prices Per Share High Low 17.03 15.50 17.71 16.51 14.70 11.91 16.56 14.65 18.80 16.90 21.20 17.55 Exhibit 2 |- XCIO DE 2011 S 27,330 8741 7,488 83.99 Cash Atents rezivable Prepaid expenses Current Assets Net operating property Goodwill Other assets Total Assets 5243 101,423 42.656 36,998 Accounts payable Miscellaneous payables and accruals Current portion, capital lease Current liabilities Capital lenses Common stock Paid-in surplus Retained earings Long-term liabilities and equity Total liabilities and stockholders equity 146,257 $23.295 65.390 7.1961 FEIT = 524.35M Stock 24.350 BATT Interest, 1 year Earnings before tax The Aderax earning 24,350 Bonds 24,350 8,125 1625 5,679 10,546 15.0 $ 070 EBIT = $66.0M Bonds Stock 66,000 66,000 9.1225 57,875 66,000 20,256 23,100 37.619 42,900 ISO 22.5 1.91 Exhibit 3 5 Shares outstanding (millions) Ernis per share Annual principal repayments 0.70 5 6,250 6,250