Question is provided in the first image. Thanks

Paragraph Styles Should Amy Marshall acquire Electro-Engineering, Inc. (EE)? Why or why not? Assume a WACC 8.1%. Estimate EE terminal value using: (i) the perpetuity method, and (ii) growing perpetuity method with a 5 percent growth rate Acquisition of Electro-Engineering, Inc. Marshall was also interested in expanding into the fiber-optic sensor segment. She was assessing whether to purchase Electro-Engineering (EE), a small manufacturer of fiber optic sensors based in Gaithersburg, Maryland, that was privately owned. EE's unique technology enabled it to construct optical temperature probes from low-cost and high-strength materials. Its sensors were less expensive, more durable, and easier to install than were other competitive optical products. EE's financial reports indicated that it had total assets of $2 million and revenues of $4 million in 2016. (Exhibits 5, 6, and 7 show EE's balance sheet, income statement, and statement of cash flows, respectively.) Marshall had investigated EE's operations and the compatibility of its business with Burton's operations. She found that, although EE's products were attractive, EE was not operated efficiently. She estimated that by giving EE access to Burton's distribution network, EE could reduce its selling general, and administrative (SG&A) expenses from 26.54% to 23.86% annually. The combined company could also offer bundled products, which Marshall estimated would enable EE to grow its sales by 24% in 2017, 17.5% in 2018, 15% in 2019, 12% in 2020, and 10% in 2021. Further, by giving EE access to Burton's supply chain, she believed EE could immediately reduce its costs of goods sold from 51% to 49%. Finally, she felt that if EE were part of a bigger enterprise, its suppliers would provide better terms of trade credit than they did now. She estimated that accounts payable would increase to 4.5% of sales and remain at that level. Paragraph Styles of trade credit than they did now. She estimated that accounts payable would increase to 4.5% of sales and remain at that level. EE's strong balance sheet also attracted Marshall's attention. She knew that EE carried a large amount of unsecured debt capacity. Through her informal conversation with EE's owner, she learned that he was willing to sell his 100% equity holdings for 10 times 2016 earnings before interest, taxes, depreciation, and amortization in exchange for Burton's common stock, which he valued at $4.75 a share. To facilitate the analysis, Marshall asked her assistant to gather the relevant information. The yield on the 10-year U.S. treasury note was 3%. The equity-risk premium was 5.8%. The yield on Baa-rated corporate bonds was 4.8%. Marshall assumed that EE would maintain its historical ratios of R&D expenses and depreciation and amortization as a percentage of sales, Aar o ES AL AaBbCcDd AaBbCcDd AaBbcc AaBb AaBbCcD 1 Normal 1 No Spac... Heading 1 Heading 2 Heading 3 V Paragraph Styles Exhibit 5 Electro-Engineering Consolidated Balance Sheets, 2014-2016 (Fiscal years ending December 31, U.S. $000s) 2014 2015 2016 Cash and equivalents Accounts receivable Inventory Prepaid expenses Current assets 379.1 485.9 279.8 27.8 1,172.5 350.2 592.0 413.7 5.2 1,361.1 359.8 680.1 480.6 16.9 1,537.4 Net PP&E Total assets 249.1 1,421.6 339.3 1,700.3 479.8 2,017.1 Bank loans Accounts payable Accrued expenses Total liabilities 340.6 126.6 104.9 572.1 340.6 153.4 77.0 570.9 310.6 175.1 101.8 587.5 Shareholders' equity Total liabilities and equity 849.5 1,421.6 1,129.4 1,700.3 1,429.6 2,017.1 Exhibit 6 Electro-Engineering Consolidated Income Statements, 2014-2016 (Fiscal years ending December 31, U.S. $000s) non Paragraph Styles Exhibit 6 Electro-Engineering Consolidated Income Statements, 2014-2016 (Fiscal years ending December 31; U.S. $000s) 2014 2015 2016 Net sales COGS Gross profit 2,944.9 1,525.0 1,420.0 3,566.3 1,811.7 1,754.6 4,072.7 2,085.2 1,987.5 SG&A expense R&D expense Depreciation and amortization Interest expense Pretax income (loss) 814.9 153.1 142.2 18.7 291.0 930.1 178.3 196.9 18.7 430.6 1,080.9 219.9 206.1 18.7 461.8 Income taxes Net income 101.8 189.1 150.7 279.9 161.6 300.2 Number of common shares (thousands) Earnings per share Cash dividend per share 1,100 0.17 0.0 1,100 0.25 0.0 1,100 0.27 0.0 Exhibit 7 Consolidated Statement of Cash Flows of Electro-Engineering (Actual), 2014-2016 (Fiscal years ending December 31, U.S. $000s) 2014 2015 2016 3002 206.1 88.1 189.1 142.2 9.0 (108.5) (28.0) 35.0 14.0 507.9 66,9 279.9 196.9 106.1 133.9 (22.6) 26.7 (27.9) 258.2 11.7 21.8 24.8 386.1 Operating Activities Net income Depreciation and amortization Less: increase (decrease) in accounts receivable Less: increase (decrease) in inventory Less increase (decrease) in prepaid expenses Add: increase (decrease) in accounts payable Add: increase (decrease in accrued expenses Operating activities-net cash flow Investing Activities Less: CapEx Investing activities - net cash flow Financing Activities Add: debt net issuance Add: net issuance of common stock Less: cash dividend Financing activities-net cash flow (230.3) (230.3) (287.1) (287.1) (3466) (346.6) (100.0) 0.0 0.0 (100.0) 0.0 0.0 0.0 0.0 (30.0) 0.0 0.0 (30.0) Total net cash flow 177.6 (28.9) 9.6 2015 Beginning cash Change in cash Ending cash 177.6 379.1 (28.9) 350.2 3502 9.6 359.8 379.1 Paragraph Styles Should Amy Marshall acquire Electro-Engineering, Inc. (EE)? Why or why not? Assume a WACC 8.1%. Estimate EE terminal value using: (i) the perpetuity method, and (ii) growing perpetuity method with a 5 percent growth rate Acquisition of Electro-Engineering, Inc. Marshall was also interested in expanding into the fiber-optic sensor segment. She was assessing whether to purchase Electro-Engineering (EE), a small manufacturer of fiber optic sensors based in Gaithersburg, Maryland, that was privately owned. EE's unique technology enabled it to construct optical temperature probes from low-cost and high-strength materials. Its sensors were less expensive, more durable, and easier to install than were other competitive optical products. EE's financial reports indicated that it had total assets of $2 million and revenues of $4 million in 2016. (Exhibits 5, 6, and 7 show EE's balance sheet, income statement, and statement of cash flows, respectively.) Marshall had investigated EE's operations and the compatibility of its business with Burton's operations. She found that, although EE's products were attractive, EE was not operated efficiently. She estimated that by giving EE access to Burton's distribution network, EE could reduce its selling general, and administrative (SG&A) expenses from 26.54% to 23.86% annually. The combined company could also offer bundled products, which Marshall estimated would enable EE to grow its sales by 24% in 2017, 17.5% in 2018, 15% in 2019, 12% in 2020, and 10% in 2021. Further, by giving EE access to Burton's supply chain, she believed EE could immediately reduce its costs of goods sold from 51% to 49%. Finally, she felt that if EE were part of a bigger enterprise, its suppliers would provide better terms of trade credit than they did now. She estimated that accounts payable would increase to 4.5% of sales and remain at that level. Paragraph Styles of trade credit than they did now. She estimated that accounts payable would increase to 4.5% of sales and remain at that level. EE's strong balance sheet also attracted Marshall's attention. She knew that EE carried a large amount of unsecured debt capacity. Through her informal conversation with EE's owner, she learned that he was willing to sell his 100% equity holdings for 10 times 2016 earnings before interest, taxes, depreciation, and amortization in exchange for Burton's common stock, which he valued at $4.75 a share. To facilitate the analysis, Marshall asked her assistant to gather the relevant information. The yield on the 10-year U.S. treasury note was 3%. The equity-risk premium was 5.8%. The yield on Baa-rated corporate bonds was 4.8%. Marshall assumed that EE would maintain its historical ratios of R&D expenses and depreciation and amortization as a percentage of sales, Aar o ES AL AaBbCcDd AaBbCcDd AaBbcc AaBb AaBbCcD 1 Normal 1 No Spac... Heading 1 Heading 2 Heading 3 V Paragraph Styles Exhibit 5 Electro-Engineering Consolidated Balance Sheets, 2014-2016 (Fiscal years ending December 31, U.S. $000s) 2014 2015 2016 Cash and equivalents Accounts receivable Inventory Prepaid expenses Current assets 379.1 485.9 279.8 27.8 1,172.5 350.2 592.0 413.7 5.2 1,361.1 359.8 680.1 480.6 16.9 1,537.4 Net PP&E Total assets 249.1 1,421.6 339.3 1,700.3 479.8 2,017.1 Bank loans Accounts payable Accrued expenses Total liabilities 340.6 126.6 104.9 572.1 340.6 153.4 77.0 570.9 310.6 175.1 101.8 587.5 Shareholders' equity Total liabilities and equity 849.5 1,421.6 1,129.4 1,700.3 1,429.6 2,017.1 Exhibit 6 Electro-Engineering Consolidated Income Statements, 2014-2016 (Fiscal years ending December 31, U.S. $000s) non Paragraph Styles Exhibit 6 Electro-Engineering Consolidated Income Statements, 2014-2016 (Fiscal years ending December 31; U.S. $000s) 2014 2015 2016 Net sales COGS Gross profit 2,944.9 1,525.0 1,420.0 3,566.3 1,811.7 1,754.6 4,072.7 2,085.2 1,987.5 SG&A expense R&D expense Depreciation and amortization Interest expense Pretax income (loss) 814.9 153.1 142.2 18.7 291.0 930.1 178.3 196.9 18.7 430.6 1,080.9 219.9 206.1 18.7 461.8 Income taxes Net income 101.8 189.1 150.7 279.9 161.6 300.2 Number of common shares (thousands) Earnings per share Cash dividend per share 1,100 0.17 0.0 1,100 0.25 0.0 1,100 0.27 0.0 Exhibit 7 Consolidated Statement of Cash Flows of Electro-Engineering (Actual), 2014-2016 (Fiscal years ending December 31, U.S. $000s) 2014 2015 2016 3002 206.1 88.1 189.1 142.2 9.0 (108.5) (28.0) 35.0 14.0 507.9 66,9 279.9 196.9 106.1 133.9 (22.6) 26.7 (27.9) 258.2 11.7 21.8 24.8 386.1 Operating Activities Net income Depreciation and amortization Less: increase (decrease) in accounts receivable Less: increase (decrease) in inventory Less increase (decrease) in prepaid expenses Add: increase (decrease) in accounts payable Add: increase (decrease in accrued expenses Operating activities-net cash flow Investing Activities Less: CapEx Investing activities - net cash flow Financing Activities Add: debt net issuance Add: net issuance of common stock Less: cash dividend Financing activities-net cash flow (230.3) (230.3) (287.1) (287.1) (3466) (346.6) (100.0) 0.0 0.0 (100.0) 0.0 0.0 0.0 0.0 (30.0) 0.0 0.0 (30.0) Total net cash flow 177.6 (28.9) 9.6 2015 Beginning cash Change in cash Ending cash 177.6 379.1 (28.9) 350.2 3502 9.6 359.8 379.1