Mr. Z, CEO of Shoes Inc., has identified Laces Ltd. as a possible acquisition ca

Question

Mr. Z, 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 $7.59 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.

Explanation / Answer

CFAo = $7.59 M CFA1 = $7.59*1.2 M CFA2 = $7.59*1.2^2 M CFA 3 = $7.59*(1.2^2)*1.05 M Enterprise Value = Present value of future cash flows = $7.59*1.2/1.15 + ($7.59*1.2^2)/1.15^2 + (($7.59*(1.2^2)*1.05)/(15%-5%))/1.15^2 = 102.96 M Enterprise Value = Debt + Equity 102.96 M = $20 +Equity Equity = 82.96 M Price per share = 82.96 M/3 million Price per share =$27.65 per share Shoes Inc. should be willing to pay $27.65 per share to acquire Laces Ltd

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