Question
Two ambitious business graduates, Markus and Kyle, are considering purchasing Crown Car Technology, an automobile technology development company. Forecasted annual sales for the next year
Two ambitious business graduates, Markus and Kyle, are considering purchasing Crown Car Technology, an automobile technology development company. Forecasted annual sales for the next year are $10 million, with operating costs equal to 70% of sales, depreciation is 5% of sales, the tax rate is 35%, and required annual investment in equipment is 10% of sales. Sales, costs, and investments are expected to grow 4% in perpetuity. On the basis of their analysis of the IT industry, Markus and Kyle anticipate to finance their company with 25% debt. The required rate of return on the debt will be 6% and the required rate of return on the equity will be 15%. Crown Car Technologys corporate tax rate is 35%. The risk-free interest rate is 3% and the market risk premium is 7%.
Part A: What is the maximum price Markus and Kyle should be willing to pay for Crown Car Technology? Explain your answer.
Part B: A national car parts company, Magna Ltd., is also considering making an offer for Crown Car Technology. The beta of Magna Ltd. is 0.8, its cost of debt is 5%, it is 40% debt-financed, and it has a 35% tax rate. What is the maximum price that Magna Ltd. should be willing to pay for Crown Car Technology? Assume that Magna Ltd.s forecast for Crown Car Technologys cash flows is the same as Markus and Kyles. Explain your answer.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started