Mr. Zapatos, CEO of Shoes Inc., has identified Laces Ltd. as a possible acquisit

Question

Mr. Zapatos, CEO of Shoes Inc., has identified Laces Ltd. as a possible acquisition candidate and a good strategic fit for the organization. Laces Ltd. has $100 million in assets and $20 million in par-value debt on the books. It currently trades for $35 per share on the open market and has 3 million common shares outstanding.

The current fiscal year closed yesterday with Laces Ltd. earning $10.50 M before interest and taxes (EBIT). After allowing for changes in NWC, taxes, depreciation, and capital expenditures, Laces Ltd. had $8.65 M in debt-free cash flows (cash flow from assets). Analysts expect their CFA to grow at 20% for the next two fiscal years and then settle down to a 5% annual growth rate thereafter. Laces Ltd.’s investors demand a return of 15% for similar risk assets.

Using the WACC-DCF approach, how much should Shoes Inc. should be willing to pay per share to acquire Laces Ltd?

Explanation / Answer

CFA1 = $8.65Mx1.20 = $10.38M

CFA2 = $10.38Mx1.20 = $12.456M

CFA3 = $12.456Mx1.05 = 13.079

Value of firm at the end of second year = 13.079/(15%-5%) = 130.79

Total value of the firm = 10.38x0.870 + 12.456x0.756 + 130.79x0.756

= $117.32M

Value per share = $117.32/3 = $39.11

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