Problem $13-21$ Firm Valuation

Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order

to establish an immediate presence in the area, the company is considering the

purchase of the privately held Joe's Party Supply. Happy Times currently has debt

outstanding with a market value of $$120$ million and a YTM of $6\mathrm{.}8$ percent. The

company's market capitalization is $$260$ million and the required return on equity is $15$

percent. Joe's currently has debt outstanding with a market value of $$25\mathrm{.}5$ million. The

EBIT for Joe's next year is projected to be $$17$ million. EBIT is expected to grow at $10$

percent per year for the next five years before slowing to $3$ percent in perpetuity. Net

working capital, capital spending, and depreciation as a percentage of EBIT are

expected to be $9$ percent, $15$ percent, and $8$ percent, respectively. Joe's has $2\mathrm{.}15$ million

shares outstanding and the tax rate for both companies is $25$ percent.

a$.$ What is the maximum share price that Happy Times should be willing to pay for Joe's?

$($Do not round intermediate calculations and round your answer to $2$ decimal

places, e$.$g$.,32\mathrm{.}16.)$

b$.$ After examining your analysis, the CFO of Happy Times is uncomfortable using the

perpetual growth rate in cash flows. Instead, she feels that the terminal value should

be estimated using the EV$/$EBITDA multiple. The appropriate EV$/$EBITDA multiple is

What is your new estimate of the maximum share price for the purchase? $($Do not

round intermediate calculations and round your answer to $2$ decimal places, e$.$g$.,$

$32\mathrm{.}16.)$

Answer is complete but not entirely correct.