Question 3: Wild Corporation is in the process of acquiring Tamed Inc. Tamed nc. has two divisions: food manufacturing and retail grocery. The current number of outstanding shares is 200. a) (8 marks) What do you recommend for the total value of the food division? What about the retail grocery division? b) (7 marks) The management of Tamed Inc. has informed us that the Cost of goods sold for the Retail Grocery division was abnormally high this year due to the temporary closure of one of the local suppliers. We expect a much lower Cost of goods sold for that division in the future. Given this information, what do you recommend for the total value of the food division? What about the retail grocery division? c) (3 marks) Wild Corporation is offering $92 per share. Given the information in part (b), would you recommend the shareholders of Tamed Inc. to accept the offer or decline it? Why? Statement of Comp. Income (Food Manufacturing Division) Sales 2,000 Cost of goods sold 700 Depreciation 300 EBIT 1,000 Interest paid 200 Taxable income 800 Taxes (40%) 320 Net Income 480 Statement of Comp. Income (Retail Grocery Division) Sales 2.500 Cost of goods sold 1,400 Depreciation 500 EBIT 600 Interest paid 100 Taxable income 500 Statement of Comp. Income (Consolidated Statement) Sales 4,500 Cost of goods sold 2100 Depreciation 800 EBIT 1,600 Interest paid 300 Taxable income 1,300 Taxes (40%) Net Income 780 Taxes (40%) 200 520 Net Income 300 Industry Price-to-earnings ratio Price/Sales ratio Companies similar to Tamed Inc. CA. Shop Co. Sunny Co. Raspberry Co. Pasta Inc. Shop With US Co. Peach Perfect Inc. Grocery Grocery Food Food Grocery Food 14 15 18.5 18 14.5 19 3 3.5 5 4.5 4 6 Question 3: We can use the value of comparable companies' financial ratios to find the value of a company's (let's say company A) stock price. First, you need to identify companies in the same industry as company A. Second, you calculate the average of financial ratios value for these comparable companies. You can then assume that company A has the same value for that financial ratio and use the most recent financial statements to calculate its value. In this question, since the company has two divisions in different industries, you need to consider finding their values separately. The first option is the P/E ratio. If everything is normal, the P/E ratio is the one we need to use to conduct the "comparable analysis." However, there are years in which we experience abnormal earnings (similar to the situation of one of the divisions in part (b)). In these uncommon years, it is better to use the Price/Sales ratio. Sometimes, a company has divisions operating in different industries. We need to find the value of these divisions separately and then add them up to find the total value, *** If you own 5% of the shares, you own 5% of the whole company's equity, not a single division