Required

A group of Holmes top management is interested in acquiring Holmes in an LBO.

a. Briefly describe the factors that make Holmes an attractive and, conversely, an unat- tractive LBO candidate.

b. (This question requires coverage of Chapter 10.) Prepare projected financial state- ments for Holmes Corporation for Year 16 through Year 20 excluding all financing. That is, project the amount of operating income after taxes, assets, and cash flows from operating and investing activities. State the underlying assumptions made.

c. Ascertain the value of Holmes common shareholders equity using the present value of its future cash flows valuation approach. Assume a risk-free interest rate of 4.2 percent and a market premium of 5.0 percent. Note that information in Part e may be helpful in this valuation. Assume the following financing structure for the LBO:

Type	Proportion	Interest Rate	Term
Term debt	50%	8%	7-year amortizationa
Subordinated debt	25	12%	10-year amortizationa
Shareholders equity	25
	100%

a Holmes must repay principal and interest in equal annual payments.

d. (This question requires coverage of Chapter 13.) Ascertain the value of Holmes common shareholders equity using the residual income approach.

e. (This question requires coverage of Chapter 14.) Ascertain the value of Holmes common shareholders equity using the residual ROCE model and the price-to- earnings ratio and the market value to book value of comparable companies

approaches. Selected data for similar companies for Year 15 appear in the following table (amounts in millions):

	Agee Robotics	GI HandlingSystems	LJG Industries	GelasCorp.
	Conveyor	Conveyor		Industrial
Industry:	Systems	Systems	Cranes	Furnaces
Sales	$4,214	$28,998	$123,034	$75,830
Net Income	$ 309	$ 2,020	$ 9,872	$ 5,117
Assets	$2,634	$15,197	$ 72,518	$41,665
Long-Term Debt	$ 736	$ 5,098	$ 23,745	$ 8,869
Common Shareholders Equity	$1,551	$ 7,473	$ 38,939	$26,884
Market Value of Common Equity	$6,915	$20,000	$102,667	$41,962
Market Beta	1.12	0.88	0.99	0.93

f. Would you attempt to acquire Holmes Corporation after completing the analyses in Parts ae? If not, how would you change the analyses to make this an attractive LBO?