Situation Bear Down, Inc. ("BDI") is looking to acquire a distressed pitch fork company based in Phoenix called Devil's R Us ("DRU"). BDI is a profitable corporate conglomerate with strong free cash flow and the ability to pay cash to fund the acquisition. President Wilma has asked you to evaluate the potential acquisition, and ultimately make a recommendation about whether BDI should purchase DRU and if so, for what price. From your analysis and evaluation of DRU's financial statements, you put together the following table of sales forecasts (numbers in millions): 2018 Net Sales COGS (75%) SG&A Interest Expense 2019 34.50 25.88 2.25 2.61 2020 42.50 31.88 2.50 3.60 You also gathered the following market information: 2.4% Risk Free Rate Market Risk Premium 5.0% Further analysis led you to determine the following information on DRU: Pre-Merger Beta 1.75 Pre-Merger % Debt 35.0% Pre-Merger Debt $27.5 million Pre-Merger Debt Rd 9.5% Tax Rate 35.0% Your study of the pitchfork market shows that with the merger and introduction of a new cardinal red and navy blue pitchfork sales will grow strongly for the next two years, but that overall the market is mature, and expected to grow at only a 2% constant rate after 2020. BDI would need to invest $0.5 million in operating capital in 2019 to build the necessary inventory to start sales. Part One: Complete an APV valuation analysis for DRU using Excel. Part Two: Answer the following questions: 1. Assume that DR has 1.5 million shares outstanding. What is the maximum price BDI should offer per share? Would you recommend they offer this price (DRU's current stock price is $18.75 per share)? Why or why not? 2. Given BDI's strong balance sheet, they could likely recapitalize DRU with 70% debt at the end of 2 years (this amounts to $75.5 million of debt at the end of 2020 at the same interest rate). What is the value of DRU's equity with this capital structure? What is the new maximum price per share after recapitalization? Situation Bear Down, Inc. ("BDI") is looking to acquire a distressed pitch fork company based in Phoenix called Devil's R Us ("DRU"). BDI is a profitable corporate conglomerate with strong free cash flow and the ability to pay cash to fund the acquisition. President Wilma has asked you to evaluate the potential acquisition, and ultimately make a recommendation about whether BDI should purchase DRU and if so, for what price. From your analysis and evaluation of DRU's financial statements, you put together the following table of sales forecasts (numbers in millions): 2018 Net Sales COGS (75%) SG&A Interest Expense 2019 34.50 25.88 2.25 2.61 2020 42.50 31.88 2.50 3.60 You also gathered the following market information: 2.4% Risk Free Rate Market Risk Premium 5.0% Further analysis led you to determine the following information on DRU: Pre-Merger Beta 1.75 Pre-Merger % Debt 35.0% Pre-Merger Debt $27.5 million Pre-Merger Debt Rd 9.5% Tax Rate 35.0% Your study of the pitchfork market shows that with the merger and introduction of a new cardinal red and navy blue pitchfork sales will grow strongly for the next two years, but that overall the market is mature, and expected to grow at only a 2% constant rate after 2020. BDI would need to invest $0.5 million in operating capital in 2019 to build the necessary inventory to start sales. Part One: Complete an APV valuation analysis for DRU using Excel. Part Two: Answer the following questions: 1. Assume that DR has 1.5 million shares outstanding. What is the maximum price BDI should offer per share? Would you recommend they offer this price (DRU's current stock price is $18.75 per share)? Why or why not? 2. Given BDI's strong balance sheet, they could likely recapitalize DRU with 70% debt at the end of 2 years (this amounts to $75.5 million of debt at the end of 2020 at the same interest rate). What is the value of DRU's equity with this capital structure? What is the new maximum price per share after recapitalization