Table 1 - Hampton Tool Company ($ in thousands) Growth to Infinity 1999 2000 2001 2002 2003 Sales Cash Cost of Goods Depreciation Selling and Admin EBIT Tax @ 35% EBIAT (+) Depreciation Cash Flow Operations $61,000 29,890 4,000 21.010 6,100 2.135 3,965 4,000 7,965 63,440 30,768 4,160 21.570 6,942 2,430 4,512 4,160 8,672 65,978 31,669 4,326 22.103 7,880 2.758 5,122 4,326 ,448 68,617 32,593 4,499 22,232 9,293 3,253 6,040 4,499 10,539 71,361 33,896 4,679 22,407 10,379 3,633 6,746 4,679 11,425 + 4% +4% +4% +4% +4% +4% +4% +4% +4% 9 Sales growth would require a corresponding buildup of spontaneous net working capital (accounts receivable + inventories - accounts payable - accrued expenses) and capital expenditures in excess of the annual depreciation expense (See Table 2.) Table 2 - Hampton Tool Company ($ in thousands) 1999 2000 2001 2002 2003 Growth to Infinity J $13,420 $13,957 $14,515 $15,096 $15,700 + 4% Spontaneous net working capital (Investment) in net working capital J (516) (537) (558) (581) (604) +4% Capital expenditures 4,938 5,136 5,341 5,555 5,777 +4% Management of Lycos, Inc. used discounted cash flow analyses to value mature acquisition targets. As of late-1998, with inflation stable at a 2% annual rate, management believed that a 10% discount rate was appropriate in valuing acquisitions in the hand tool business. What is the maximum price that Lycos should be willing to pay? 7. Lycos, Inc. was considering the acquisition of a smaller competitor in the hand tool business. The target, Hampton Tool, had been reasonably successful; but sales growth seemed very limited, and the controlling family was interested in 'cashing out'. Management of Lycos believed that the integration of the two firms would result in significant cost savings. Specifically, purchasing economies should reduce cost of goods sold by 1.5 percentage points over the next 2-3 years. It also seemed likely that Hampton Tool's Selling and Administrative costs would decline by 3.0 percentage points. (See Table 1 for pro forma income statements that include the forecast cost saves.)