QUESTION 1 Ayenya Inc. is trying to position itself to take advantage of the new Caribbean single market. Management believed that a critical part of the firm's strategy would be a takeover bid for a firm in a neighbouring Caribbean country. The following is available for both firms: Summarized data for the financial year to March 31, 2006 Ayenya Inc. Target ($ mls) ($ mls) Sales 4200 1800 Profit before taxes (after interest payments) 410 200 Taxation 120 60 Fixed Assets (net) 1100 630 Current Assets 1220 940 Current Liabilities 860 710 Medium and long-term 400 120 Shareholders' funds 1060 740 QUESTION 1 (cont'd) A yenya Inc. has 80 million issued ordinary shares and the target 30 million. Typical of Ayenya Inc.'s medium and long-term liabilities is a 12% debenture with three years to maturity, a par value of $1000 and a current market price of $1088. The finance team of Ayenya Inc has produced the following forecasts of financial data for the competitor if it is taken over. 2007 2008 2009 2010 Net sales $230,000,000 $261,000,000 $281,000,000 $298,000,000 Cost of goods sold (50%) $115,000,000 $131,000,000 $141,000,000 $149,000,000 Selling & admin expenses $32,000,000 $34,000,000 $36,000,000 $38,000,000 Depreciation $40,000,000 $42,000,000 $42,000,000 $42,000,000 Interest $18,000,000 $16,000,000 $14,000,000 $12,000,000 Capital expenditures $50,000,000 $52,000,000 $55,000,000 $58,000,000 The corporation tax rate is 30%, the risk free rate is 6% annually and the return on the market is 14% annually. The target's equity beta is 1.2. Post take-over cash flows are expected to grow at 5% annually after 2010. The finance team at Ayenya Inc. also notes that the realizable value of the target's assets, net of all debt repayments, is estimated at $ 820 million and the PE ratios of two similar firms are 13:1 and 15:1 respectively. Required: Discuss and evaluate what price, or range of prices, Ayenya Inc. should offer to purchase the target. State clearly any assumptions that you make. (20 Marks)