I am not sure if I am using the correct formulas, thank you to anyone who can as
ID: 2651895 • Letter: I
Question
I am not sure if I am using the correct formulas, thank you to anyone who can assist. Please show work.
Astro Zeneca (Private)
One possible acquisition is a privately held company in an established (mature) industry. Astro Zeneca a pharmaceutical company.
Relevant Financials are:
Free cash flow for the past year was $2,000,000.
The company has a WACC of 10%.
Outstanding shares: 50,000
Assets:
Liabilities and stockholders’ equity:
Book value of Long term debt: $500,000
Book value of the firm’s equity: $500,000
What is the value of the firm?
What is the market value of the firm’s equity?
What is the firm’s MVA?
What is the firm’s stock price?
Zehpher Intelligence (Public Company)
A second possible Acquisition, Zehpher Intelligence, an IT company is
operating in a rapid growth industry.
Relevant financials:
Free cash flow for the past year was $10,000,000
The company’s WACC is 20%
Outstanding shares 150,000
Assets:
Book value of long term debt: $2,000,000
Book value of equity: $20,000,000
What is the value of the firm?
What is the market value of the firm’s equity?
What is the firm’s MVA?
What is the company’s stock price
Please discuss in detail how Warren Buffett might evaluate these proposed takeovers:
which company he would prefer and why,
Explanation / Answer
Answer: Firm value =Free cash flow/WACC
= 2000000/0.10
=20000000
Market value of the firm’s equity:2000000/1.10=1818181.818
MVA=20000000-1818181.81=181818.182
Stock Price =10
Answer:
Firm value =Free cash flow/WACC
= 10000000/0.20
=50,000000
Market value of the firm’s equity:10000000/1.20=8333333.333
MVA=10000000-8333333.333=1666666.67
Stock Price =20000000/150000=133.33
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