- A recent annual income statement for Stone Creek Roofing is shown below.
Net sales $5,000
Cost of sales 3,200
Gross profit 1,800
Operating expense 800
Depreciation expense 200
Operating income 800
Interest expense 100
Income before tax 700
Tax 175
Income after tax $525
Assume that during the year, Stone Creek spent $180 on new capital equipment and increased current assets net of non-interest-bearing current liabilities by $120. What was Stone Creek’s free cash flow in this year? $500 - Acquisitions create shareholder value on average. True
- All else equal, a terminal value based on a no-growth perpetuity would be higher than a terminal value based on a perpetuity with 2-percent growth. False
- An acquirer should be willing to pay a higher control premium for a poorly managed company than for a well-managed company. True
- An acquirer should never consider a target that would reduce the acquirer’s earnings per share. False
- Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated present value of the enhancements from the merger have to be? $150 million
- Consider the following premerger information about a bidding firm (Buyitall Inc.) and a target firm (Tarjay Corp.). Assume that neither firm has any debt outstanding.
Buyitall Tarjay
Shares outstanding 1,500 1,100
Price per share $32 $26
Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600. What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash? $400 - Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil? $6.38 billion
- Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. Immediately prior to the Ginormous Oil bid, the shares of Slick Co. traded at $33 per share. What value did Ginormous Oil place on the control of Slick Co.? $2.21 billion
- In business valuation, a typical discount for lack of marketability is about 10 percent. False
- In venture-capital valuation, the post-money valuation is equal to the pre-money valuation plus the amount of the venture capitalist’s investment. True
- Rational investors would never value a company’s stock below its liquidation value. False
- STU Corporation has $3 million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5, and earnings per share of comparable firm 2 is $2. Comparable firm 1’s stock is trading for $50, and comparable firm 2’s stock is trading for $28. What is the estimated stock price of STU using the method of comparables? (Use average multiples of the comparable firms when doing the calculations.) $36.00
- Terminal value estimates based on book value tend to understate a company’s terminal value. True
- The following table presents forecasted financial and other information for Havasham Industries:
2015 2016 2017
Projected EBIT $317 $339 $363
Earnings after tax 197 210 225
Free cash flow 135 144 155
Havasham’s WACC 8.2%
Expected growth rate in FCFs after 2017 4.0%
Warranted MV firm/FCF in 2017 19.4
Warranted P/E in 2017 18.7
What is an appropriate estimate of Havasham’s terminal value as of the end of 2017 using the perpetual-growth equation as your estimate? None of the options are correct. - The following table presents forecasted financial and other information for Havasham Industries:
2015 2016 2017
Projected EBIT $317 $339 $363
Earnings after tax 197 210 225
Free cash flow 135 144 155
Havasham’s WACC 8.2%
Expected growth rate in FCFs after 2017 4.0%
Warranted MV firm/FCF in 2017 19.4
Warranted P/E in 2017 18.7
What is an appropriate estimate of Havasham’s terminal value as of the end of 2017 using a warranted price-to-earnings multiple as your estimate? $4,207.5 million - The following table presents forecasted financial and other information for Havasham Industries:
2015 2016 2017
Projected EBIT $317 $339 $363
Earnings after tax 197 210 225
Free cash flow 135 144 155
Havasham’s WACC 8.2%
Expected growth rate in FCFs after 2017 4.0%
Warranted MV firm/FCF in 2017 19.4
Warranted P/E in 2017 18.7
What is an appropriate estimate of Havasham’s terminal value as of the end of 2017 using a warranted multiple of free cash flow as your estimate? $3,007.0 million - Tutter Corporation is being valued using discounted cash flow methodology with terminal value calculated as a growing perpetuity. Not including the terminal value, the present value of projected free cash flows for years 1 through 5 is $200 million (total). In year 5, projections show free cash flow of $60 million. What is the estimated fair market value of Tutter Corporation? Assume a WACC of 10% and a growth rate of 2% $675 million
- When an acquirer purchases all of a target firm’s equity, it must assume the target’s liabilities. True
- When an acquirer values a potential target, it should discount the target’s cash flows at the target’s cost of capital. True
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