Sooner is looking to acquire a distressed farm feed company based in Stillwater called Cowboy. Sooner is a profitable corporate conglomerate with strong free cash flow and the ability to pay cash to fund the acquisition. President Sooner has asked you to evaluate the potential acquisition, and ultimately make a recommendation about whether Sooner should purchase Cowboy and if so, for what price. From your analysis and evaluation of Cowboy's financial statements, you put together the following table of sales forecasts (numbers in millions):

You also gathered the following market information:

Further analysis led you to determine the following information on Cowboy:

Your study of the farm feed market shows that with the merger and introduction of a new crimson and cream packaging material 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. Sooner 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 Cowboy using Excel (show all steps and formulas)

Part Two: Answer the following questions:

1. Assume that Cowboy has 1.5 million shares outstanding. What is the maximum price Sooner should offer per share? Would you recommend they offer this price (Cowboys current stock price is $18.75 per share)? Why or why not?

2. Given Sooners strong balance sheet, they could likely recapitalize Cowboy 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 Cowboys equity with this capital structure? What is the new maximum price per share after recapitalization?

***all steps and formulas must be shown in spreadsheet

2018 2019 Net Sales COGS (75%) SG&A Interest Expense 34.50 25.88 2.25 2.61 2020 42.50 31.88 2.50 3.60 Risk Free Rate Market Risk Premium 2.4% 5.0% Pre-Merger Beta Pre-Merger % Debt Pre-Merger Debt Pre-Merger Debt Rd Tax Rate 1.75 35.0% $27.5 million 9.5% 35.0% 2018 2019 Net Sales COGS (75%) SG&A Interest Expense 34.50 25.88 2.25 2.61 2020 42.50 31.88 2.50 3.60 Risk Free Rate Market Risk Premium 2.4% 5.0% Pre-Merger Beta Pre-Merger % Debt Pre-Merger Debt Pre-Merger Debt Rd Tax Rate 1.75 35.0% $27.5 million 9.5% 35.0%