Name: M&A; Assignment (BSNS 4112) 20 Points. The Deodline is this Thursday (Nov

Question

Name: M&A; Assignment (BSNS 4112) 20 Points. The Deodline is this Thursday (Nov 6). Submit your hardcopy in class. These questions are designed to develop students' ability to make strategic decision. Students will have opportunities to integrate knowledge about corporate-level strategy with analytical skills learned from finance classes. 1-3. Free Cash Flow; WACC; NPV (3 questions) 2013 2014 2015 2016 2017 2018 2019 M&A; Revenue EBIT After Tax Capital Expenditure Dep. & Amortization Net Working Capital 142343 152235 106364 144978 186152 205309 213635 4522 4225 2214 3214 3621 4314 5835 1577 1823 1088 1657 2606 2395 3123 437 575 622 1026 1066 104S 1087 Change 0 4808 6090 1539 903 1689 1758 Free Cash Flow 33827785 4342 1044 1178 Other information Your Investment in Acquisition $2,000 in 2017 Capital Structure $1,200 from Bank; S800 from Investors Interest Rate-5% Cost of Equity-10% Corporate Tax Rates 35%

Explanation / Answer

1. FCF in 2018 = EBIT After Tax- Capex + Depreciation and Amortization- Change in working capital

=4314-2395+1045-1689= 1275

FCF in 2019= 5835-3123+1087-1758= 2041

2. Given tax rate= 35%

D/E Ratio = $1200/$800 = 3/2

Interest rate= 5%

Cost of equity= 10%

So, WACC= (3/5)*(1-0.35)*5 + (2/5)*10 = 1.95+4= 5.95%

3. Initial Investment= $2,000

So, NPV= -2000 + 1275/(1+0.0595) + 2041/(1+0.0595)^2

= 1021.6

As NPV is positive, so we should accept the project. It means the rate of return of the project is greater than cost of capital of the firm and thus it is a good investment.

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