Total of 21 questions to answer. Some questions are already done and answer is highlighted yellow. Due tonight at 12PM so please do before 11pm. Explanation on math portion preferred.

QUESTION 1 1. Deming Tiles (DT) is being considered for acquisition by Jenks Hardware (JH). The stock price of DT is currently at $35 per share; current EPS is $2.75. The average P/E ratio in DT's industry is 25 while that of JH is 15. Using the P/E multiple approach, how much is DT worth to JH? What is your estimate of the stock price? $43.75 $25.25 $68.75 None of the above QUESTION 2 1. Suppose the EBIDTA multiple for a sample of firms in a certain industry is 3.5. If the EBITDA of a target firm in this industry is $5 million, what is your estimate of the target's stock price if the target has 2 million shares outstanding and $7 million in debt? $45.02 $17.50 $5.25 None of the above QUESTION 3 1. Which of the following statements is correct about the corporate valuation model in a merger analysis? The value of the target firm's operations is estimated as the present value of the firm's projected FCFs, discounted at the WACC. The value of the target firm is equal to NOPAT, discount at the WACC plus non-operating assets. The value of the target firm's operations is estimated as the present value of FCFs and interest tax savings, discounted at the unlevered cost of equity. Answers a and c are correct. QUESTION 4 1. Which of the following statements about valuing a firm using the APV model is correct? The unlevered horizon value is calculated by discounting the horizon future FCF and tax savings at the levered cost of equity. Often, the discounting is based on some growth assumption. The unlevered horizon value is calculated by discounting the horizon future FCF at the levered cost of equity. Often, the discounting is based on some growth assumption. The unlevered horizon value is calculated by discounting the horizon's future FCF at the cost of unlevered equity. Often, the discounting is based on some growth assumption. None of the statements above is correct. QUESTION 5 1. Which of the following statements about valuing a firm using the APV model is correct? The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity. The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the unlevered cost of equity. The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity. None of the statements above is correct. QUESTION 6 1. American Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware. American's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Eastern is 16 percent. Eastern has 4 million shares outstanding and no debt. Eastern's current price is $16.25. What is the maximum price per share that American Hardware should offer? $16.25 $16.97 $18.13 None of the above QUESTION 7 1. Volunteer Pizza, a regional pizza chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed with 20 percent debt at a cost of 8%. Volunteer's analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.) The acquisition would be made immediately, if it is undertaken. Eastern's pre-merger beta is estimated to be 2.0, and its post-merger tax rate would be 34 percent. The riskfree rate is 8 percent, and the market risk premium is 4 percent. Calculate the appropriate rate for discounting the free cash flows and the interest tax savings. Note that this rate is rEU. Hint: first, calculate cost of levered equity (rEL) using CAPM. Then calculate rEU as wDrD + wErEL. 14.4 % QUESTION 8 1. Kazeem Metals Company has a debt ratio of 30%. Interest rate on its debt is 9%. Its unlevered beta is 1.3 and tax rate is 40%. Suppose that the riskfree interest rate is 5% and the required rate of return on the market is 12%. Calculate Kazeem's cost of common equity (i.e. rEL). Hint: First use the Hamada formula to calculate levered beta (bL). Then with your levered beta, calculate rEL. 16.44 % QUESTION 9 1. [REPEAT INFO] Kazeem Metals Company has a debt ratio of 30%. Interest rate on its debt is 9%. Its unlevered beta is 1.3 and tax rate is 40%. Suppose that the riskfree interest rate is 5% and the required rate of return on the market is 12%. Calculate Kazeem's cost of unlevered equity (i.e. rEU). Hint: Use the CAPM with unlevered beta. 16.34% 15.89% 14.10% None of the above 1 points QUESTION 10 1. For this and the next 2 questions: The Woodridge Hotels intends to acquire Wellington Resorts using new debt financing. The Woodridge estimates interest payments of $2 million dollars per year for 3 years after the acquisition. Expected free cash flows over the same period are $5 million, $6.5 million, and $8 million, respectively. Growth rate after this period is estimated to be 4%. Tax rate is 40%. Wellington's current WACC is 12% and unlevered cost of equity (rEU) is 15%. Wellington's capital structure will be different from its pre-merger capital structure if acquired by The Woodridge. Calculate the unlevered horizon value (UHV) of the free cash flows. $75.6364 million $61.4545 million None of the above QUESTION 11 1. Calculate the horizon value tax shield (HVTS). $7.5636 million QUESTION 12 1. In a merger valuation such as this, The corporate valuation method is still appropriate The constant growth valuation model should be used to calcualte the target firm's value of operations today The adjusted present value (APV) method should be used QUESTION 13 1. In a M&A, the horizon value of the target firm could be calculated based on the target's current WACC if: The acquiring firm intends to maintain the target firm's current capital structure after the initial post-merger period The acquiring firm's capital structure will also apply to the target firm, if acquired None of the above QUESTION 14 1. Which of the following may be considered a questionable reason for a merger? Diversification of investment projects QUESTION 15 1. Suppose in a M&A, a target firm's current market value is $50 million. But you estimate its value - as part of the acquiring firm - to be $60 million. The target firm has 5 million shares outstanding. What is the most the acquirer should bid in order to preserve all of the synergistic benefits for its (acquirer's) stockholders? $12 per share $10 per share $2 per share None of the above QUESTION 16 1. Suppose in a M&A, a target firm's current market value is $50 million. But you estimate its value - as part of the acquiring firm - to be $60 million. The target firm has 5 million shares outstanding. How much merger premium would be created due to the potential synergies of the merger? $10 million QUESTION 17 1. Empirical evidence on mergers and acquisitions indicates that most of the merger premium flows to stockholders of the Target firm QUESTION 18 1. Which of the following is a function of the investment banker in a M&A process? [I] identifying potential target firms [II] arranging mergers [III] developing defensive tactics [IV] establishing a fair value of the target firm [V] arranging financing of the merger. I, II, III II, III, IV All of the above QUESTION 19 1. For this and the next 7 questions. Keri Automotive Corporation (KAC) is a national auto parts chain. It is considering the acquisition of a smaller chain called Southern Auto Company. KAC's analysts estimate that the merger will result in the following cash flows (in millions): Year 1 2 3 4 FCF $2 $5 $5 $7 Interest expenses $1 $2 $2 $3 Unlevered horizon value (UHV4) $107 Horizon value interest tax savings (HVITS4) $20 2. Southern Auto Company (SAC) is currently financed with 30% debt at an interest rate of 10%. Current debt level is $15 million. SAC's pre-merger beta (BL) is 2, and its postmerger tax rate would be 40%. Assume the risk-free interest rate is 8%, and market risk premium (i.e. market return minus riskfree interest rate) is 4%. Using the CAPM, calculate SAC's cost of levered equity (use BL); i.e. calculate rEL. 16% 8% None of the above QUESTION 20 1. Calculate SAC's cost of unlevered equity (that is rEU). 14.2% 14.5% None of the above QUESTION 21 1. Calculate SAC's unlevered beta (BU). 1.5 9 QUESTION 22 1. Calculate value of unlevered firm for SAC. For this problem, use cost of unlevered equity (rEU) of 14%. Do NOT use the cost of unlevered equity you calculated earlier. $76.473733 million $13.121143 million $14.05853 million $90.532263 million None of the above QUESTION 23 1. Calculate present value of interest tax savings SAC. Again, for this problem, use cost of unlevered equity (rEU) of 14%. Do not use the cost of unlevered equity you calculated earlier. $14.05853 million QUESTION 24 1. Using the APV method, calculate SAC's Value of operations (VOP). $76.473733 million $86.156214 million $14.05853 million $90.532263 million None of the above QUESTION 25 1. What is the value of the target company's (SAC) equity. Recall that debt level is $15 million. About $62.48 million About $76.96 million About $78.86 million None of the above QUESTION 26 1. Calculate the target's stock price if number of shares is 22 million About $3.43 QUESTION 27 1. [ADDED FALL 2013] FOR THIS AND THE NEXT 4 QUESTIONS. CASH FLOW ESTIMATION & CORPORATE VALUATION IN A MERGER. PERFORM YOUR ANALYSIS ON SPREADSHEET AND THEN CHOOSE FROM MULTIPLE-CHOICE ANSWERS BELOW. Goi Sugar & Confectionary Industries, Inc. wishes to make a tender offer for Aon Corporation in a conglomerate merger. The target firm's cost of capital will be used in the merger analysis. The financials for the two firms are summarized below. You wish to calculate the intrinsic value of Aon Corporation, the target firm. Calculate the target firm's (Aon) cost of common equity using the CAPM. Bidder Target Goi Aon YTM: rD 10.00% 18.00% Tax Rate: T 40% 40% After-tax cost of debt: rD(1-T) 6.00% 10.80% Beta 1.20 2.00 Market Risk premium 5% 5% Riskfree interest rate: rF 7.00% 7.00% Cost of equity: rE 13.00% Debt ratio: wD 30% Input for Target Firm's Valuation Last year's revenue (i.e. revenue at time 0) $9,434 Revenue Growth 8.00% Future constant growth rate 5.00% COGS - as % of revenues 60% Operating expenses - as % of revenues 15% Depreciation (straightline) $1,000 Net Working Capital (NWC) - as % of sales 12% Capital expenditure per year $2,000 17.0% QUESTION 28 30% 1. Calculate the target firm's weighted average cost of capital. Caution! Correct calculation of WACC is required to correctly perform the valuation analysis below. 15.14% 17.0% 10.80% None of the above QUESTION 29 1. Calculate the target firm's FCF in Year 5, before accounting for the horizon value. -$162 $356 $1,992 $4,043 None of the above QUESTION 30 1. Calculate the target firm's TOTAL cash flow in Year 5, i.e. after accounting for the horizon value. -$162 $356 $1,992 $4,043 None of the above QUESTION 31 1. Calculate the intrinsic value of the target firm's value of operations today. -$162 $1,992 $356 $4.043 None of the above