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##### Chapter 09 - Business Valuation and Corporate Restructuring

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solution

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Question;1. Which of the following statements are correct?;I. Liquidation value of a firm is equal to the present worth of expected future;cash flows from operating activities.;II. When an acquiring firm purchases a target firm's equity, the acquirer must;assume the target's liabilities.;III. The market value of a public company reflects the worth of the business to;minority investors.;IV. The fair market value of a business is usually the lower of its liquidation;value and its going-concern value.;A. I and III only;B. II and IV only;C. II and III only;D. I, II, and III only;E. II, III, and IV only;F. None of the above.;2. 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?;A. $1.46 billion;B. $3.46 billion;C. $4.92 billion;D. $6.38 billion;E. $8.38 billion;F. None of the above.;3. 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.?;A. $2.21 billion;B. $2.71 billion;C. $4.17 billion;D. $6.38 billion;E. None of the above.;4. Which of the following statements is/are correct?;I. Going-concern value of a firm is equal to the present value of expected net;income.;II. When a buyer values a target firm, the appropriate discount rate is the;buyer's weighted-average cost of capital.;III. The liquidation value estimate of terminal value usually vastly understates;a healthy company's terminal value.;IV. The value of a firm's equity equals the discounted cash flow value of the;firm minus all liabilities.;A. II only;B. III only;C. I and II only;D. II and III only;E. II, III, and IV only;F. None of the above.;5. Which of the following statements are correct?;I. Going-concern value of a firm is equal to the present value of expected;future cash flows to owners and creditors.;II. When an acquiring firm purchases a target firm's equity, the acquirer need;not assume the target's liabilities.;III. The market value of a public company reflects the worth of the business to;minority investors.;IV. The fair market value of a business is usually the lower of its liquidation;value and its going-concern value.;A. I and III only;B. II and IV only;C. II and III only;D. I, II, and III only;E. II, III, and IV only;F. None of the above.;6. The following table presents forecasted financial;and other information for Scott's Miracle-Gro Co.;What is an appropriate estimate of Scott's terminal value as of the end of;2014, using the perpetual-growth equation as your estimate?;A. $161 million;B. $363 million;C. $3,690 million;D. $3,838 million;E. $5,357 million;F. None of the above.;7. The following table presents forecasted financial;and other information for Scott's Miracle-Gro Co.;What is an appropriate estimate of Scott's terminal value of equity as of the;end of 2014?;A. $225 million;B. $3,833.0 million;C. $4,207.5 million;D. $4,365.0 million;E. $6,788.1 million;F. None of the above.;8. The following table presents forecasted financial;and other information for Scott's Miracle-Gro Co.;What is an appropriate estimate of Scott's terminal value as of the end of;2014, using a warranted multiple of free cash flow as your estimate?;A. $155 million;B. $2,898.5 million;C. $3,007.0 million;D. $4,365.0 million;E. $7,042.2 million;F. None of the above.;9. 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 value of the;enhancements from the merger have to be?;A. $0;B. $75 million;C. $150 million;D. $710 million;E. $860 million;F. None of the above.;10. 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 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?;A. $400;B. $600;C. $1,800;D. $2,200;E. $2,600;F. None of the above.;Figure 9.1In March of 2011, Macklemore Corp. considered an acquisition of Blue;Scholar Learning, Inc. (BSL), a privately-held educational software firm. As a;first step in deciding what price to bid for BSL, Macklemore's CFO, Ryan Lewis;has prepared a five-year financial projection for the company assuming the;acquisition takes place. Use this projection and BSL's 2010 actual financial;figures to answer the questions below.;11. What is BSL's free cash flow (in $ millions) for;2011?;A. - $938;B. - $792;C. - $7;D. $122;E. $1,091;F. None of the above.;12. Estimate the present value of BSL's free cash flow;(in $ millions) for the years 2011 - 2015. Macklemore's WACC is 8.0 percent.;BSL's WACC is 11.5 percent, and the average of the two companies' WACCs;weighted by sales, is 8.2 percent.;A. - $1.29;B. $628.24;C. $720.58;D. $726.68;E. $743.94;F. None of the above.;13. Estimate BSL's value (in $ millions) at the end of;2010 assuming it is worth the book value of its assets at the end of 2015.;Macklemore's WACC is 8.0 percent. BSL's WACC is 11.5 percent, and the average;of the two companies' WACCs, weighted by sales, is 8.2 percent.;A. $628.24;B. $3,669.01;C. $4,297.25;D. $4,412.94;E. $4,984.28;F. $6,951.24;G. None of the above.;14. Assume BSL is worth the book value of its assets;at the end of 2015. Macklemore's WACC is 8.0 percent. BSL's WACC is 11.5;percent, and the average of the two companies' WACCs, weighted by sales, is 8.2;percent. What is the maximum acquisition price (in $ millions) Macklemore;should pay to acquire BSL's equity?;A. $1,702.25;B. $2,227.25;C. $2,342.94;D. $2,383.94;E. $2,603.25;F. $4,297.25;G. None of the above.;15. Estimate BSL's value (in $ millions) at the end of;2010 assuming that in the years after 2015 the company's free cash flow grows 4;percent per year in perpetuity. Macklemore's WACC is 8.0 percent. BSL's WACC is;11.5 percent, and the average of the two companies' WACCs, weighted by sales;is 8.2 percent.;A. $4,297.25;B. $4,571.09;C. $4,686.78;D. $6,181.09;E. $5,351.19;F. $7,423.16;G. None of the above.;16. Assume that in the years after 2015 the company's;free cash flow grows 4 percent per year in perpetuity. Macklemore's WACC is 8.0;percent. BSL's WACC is 11.5 percent, and the average of the two companies;WACCs, weighted by sales, is 8.2 percent. What is the maximum acquisition price;(in $ millions) Macklemore should pay to acquire BSL's equity at the end of;2010?;A. $1,976.09;B. $2,501.09;C. $2,877.09;D. $4,195.09;E. $4,571.09;F. None of the above.;17. Estimate BSL's value (in $ millions) at the end of;2010 assuming that at year-end 2015 the company's equity is worth 15 times;earnings after tax and its debt is worth book value. Macklemore's WACC is 8.0;percent. BSL's WACC is 11.5 percent, and the average of the two companies;WACCs, weighted by sales, is 8.2 percent.;A. $628.24;B. $3,669.01;C. $7,429.74;D. $6,343.26;E. $6,755.83;F. $7,008.06;G. None of the above.;18. Assume that at year-end 2015 the company's equity;is worth 15 times earnings after tax and its debt is worth book value.;Macklemore's WACC is 8.0 percent. BSL's WACC is 11.5 percent, and the average;of the two companies' WACCs, weighted by sales, is 8.2 percent. What is the;maximum acquisition price (in $ millions) Macklemore should pay to acquire;BSL's equity at the end of 2010?;A. $3,484.68;B. $4,723.26;C. $4,938.06;D. $5,554.68;E. $6,343.26;F. None of the above.;Short Answer Questions;19. The following information is available about;Chiantivino Corp. (CC);An activist investor is confident that by terminating CC's money-losing;fortified wine division, she can increase free cash flow by $4 million annually;for the next decade. In addition, she estimates that an immediate, special;dividend of $10 million can be financed by the sale of the division.;a. Assuming these actions do not affect CC's cost of capital, what is the;maximum price per share the investor would be justified in bidding for control;of CC? What percentage premium does this represent?;b. Show your answer if you conduct a sensitivity analysis by assuming the cost;of capital is 15 percent and the increased cash flow is only $3.5 million per;year.;20. Below is a recent income statement for Gatlin;Camera;Calculate Gatlin's free cash flow in this year assuming it spent $510 on new;capital equipment and increased current assets net of noninterest-bearing;current liabilities $340.;The following table presents a four-year forecast for;Kenmore Air, Inc.;21. Estimate the fair market value of Kenmore Air at;the end of 2012. Assume that after 2016, earnings before interest and tax will;remain constant at $200 million, depreciation will equal capital expenditures;in each year, and working capital will not change. Kenmore Air's;weighted-average cost of capital is 11 percent and its tax rate is 40;percent.;22. Estimate the fair market value per share of;Kenmore Air's equity at the end of 2016 if the company has 40 million shares;outstanding and the market value of its interest-bearing liabilities on the;valuation date equals $250 million.;23. Estimate the fair market value of Kenmore Air's;equity per share at the end of 2012 under the following assumptions;a. EBIT in year 2016 is $200 million, and then grows at 5 percent per year;forever.;b. To support the perpetual growth in EBIT, capital expenditures in year 2017;exceed depreciation by $30 million, and this difference grows 5 percent per;year forever.;c. Similarly, working capital investments are $15 million in 2017, and this;amount grows 5 percent per year forever.;24. Estimate the fair market value of Kenmore Air's;equity per share at the end of 2012 under the following assumptions;a. EBIT in year 2016 will be $200 million.;b. At year-end 2016, Kenmore Air has reached maturity, and analysts expect its;equity will sell for 12 times year 2016 net income.;c. At year-end 2016, Kenmore Air has $250 million of interest-bearing;liabilities outstanding at an average interest rate of 10 percent.;25. Ametek, Inc. is a billion dollar manufacturer of;electronic instruments and motors headquartered in Paoli, Pennsylvania. Use the;following information on Ametek and five other similar companies to value;Ametek, Inc. on December 31, 2010.;*American Power Conversion has no interest-bearing debt;outstanding.;MV = Market value, BV = Book value. Market value is estimated as book value of;interest-bearing debt + market value of equity. Earnings are fiscal year earnings.;26. Rainy City Coffee's (RCC) free cash flow next year;will be $100 million and it is expected to grow at a 4 percent annual rate;indefinitely. The company's weighted average cost of capital is 10 percent, the;market value of its liabilities is $1 billion, and it has 20 million shares;outstanding.;a. Estimate the price per share of RCC's common stock.;b. A hedge fund believes that by selling the company's private jet and;instituting other cost savings, it can increase RCC's free cash flow next year;to $110 million and can add a full percentage point to RCC's growth rate;without affecting its cost of capital. What is the maximum price per share the;hedge fund can justify bidding for control of RCC?;27. Empirical evidence indicates that the returns to;shareholders of the target firm vary significantly from the returns to the;shareholders of the acquiring firm. Identify the shareholders that tend to;realize the smaller return. Does your answer depend on the way the acquisition;is financed?

Paper#48490 | Written in 18-Jul-2015

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