SeaBoard’s Free Cash Flows 2014 2015 2016 2017 Sales $100,000,000 $140,000,000 $
ID: 2733277 • Letter: S
Question
SeaBoard’s Free Cash Flows
2014
2015
2016
2017
Sales
$100,000,000
$140,000,000
$175,000,000
$195,000,000
Cost of service
58,000,000
87,000,000
113,100,000
124,700,000
Selling & Admin expense
3,480,000
5,655,000
7,910,000
8,928,000
EBIT
38,520,000
47,345,000
53,990,000
61,372,000
Taxes (39%)
15,022,800
18,464,550
21,056,000
23,935,000
NOPAT
23,497,200
28,880,450
32,933,900
37,436,920
Investments
2,300,000
8,500,000
9,200,000
7,500,000
Free Cash Flows
$21,197,200
$20,380,450
$23,733,900
$29,936,920
Interest Tax Savings
Interest
$6,500,000
$7,100,000
$7,200,000
$8,000,000
Interest Tax Savings (39%)
$2,535,000
$2,769,000
$2,808,000
$3,120,000
AmeerTechnology predicts that the growth for SeeBoard for the first 4 years will be a high variable growth due to the potential demand for sensors from the existing AmeerTechnology customers. The company’s growth prediction for the first 4 years was based on the market research company’s forecast. The financial research also supports the company’s argument that in a merger and acquisition the company experiences a variable growth rate for first few years and returns to constant growth. The company believes that at the end of the fourth year the constant growth will start and the firm will experience a constant growth of 5% per year. After the acquisition, the firm will maintain a capital structure of 40% debt and 60% equity. The cost of borrowing will remain 10%, the company is in a 39% tax bracket, the risk-free rate is 3.5%, market returns are 11%, and the beta after the acquisition will be 1.65. The company has 5 million shares outstanding, and the debt after the acquisition will be $80 million. The stock of SeeBoard is currently trading in the stock market at $45 per share.
Assuming that you have been hired by the company as an analyst to help the top management in negotiating the acquisition price of the SeeBoard, prepare an analysis of fair value based on the FCF, and the other data provided by the company. The management is specifically interested in 1) fair value of the company, and 2) the total acquisition premium the company could offer to Seaboard. All of your recommendations must have supporting data and analysis.
1. Compute the Weighted Average Cost of Capital (WACC).
2. Compute the Free Cash Flows.
2014
2015
2016
2017
Sales
$100,000,000
$140,000,000
$175,000,000
$195,000,000
Cost of service
58,000,000
87,000,000
113,100,000
124,700,000
Selling & Admin expense
3,480,000
5,655,000
7,910,000
8,928,000
EBIT
38,520,000
47,345,000
53,990,000
61,372,000
Taxes (39%)
15,022,800
18,464,550
21,056,000
23,935,000
NOPAT
23,497,200
28,880,450
32,933,900
37,436,920
Investments
2,300,000
8,500,000
9,200,000
7,500,000
Free Cash Flows
$21,197,200
$20,380,450
$23,733,900
$29,936,920
Explanation / Answer
1) Specific cost of capital:
Cost of debt (Kd) = 10 * (1 - 0.39) = 6.1%
Cost of equity (Ke) = 3.5 + 1.65(11 - 3.5) = 15.88%
WACC = 6.1*0.4 + 15.88*0.6 = 11.97%
2)
2014 2015 2016 2017 Free cash flows to the firm $21,197,200 $20,380,450 $23,733,900 $29,936,920 pvif @ 11.97% 0.8931 0.7976 0.7124 0.6362 pv $18,931,142 $16,255,877 $16,906,903 $19,045,852 cumulative PV $71,139,775 Continuing value = (29936920*1.05)/(0.1197 - 0.05) 450986600 PV of continuing value = 450986600*0.6362 286917425 Value of the firm (71139775+286917425) 358057200 Less: Value of debt 80000000 Value of equity 278057200 no of equity shares 5000000 Fair value per equity share 55.61 Current Market value per share 45.00 Premium per share 10.61 Total premium that can be paid (for 5 million shares) 53057200Related Questions
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