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 $7.02 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 (i.e., WACC = rA = 15%).

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

Explanation / Answer

Answer:

As WACC and DCF approach, the shoes INC should pay 8.39 dollar to buy the company laces.

in dollars 1 2 3 4 cfa 7020000 8424000 10108800 10614240 Discount at the rate 15% 0.869565 0.756144 0.657516 0.571753 pv value of CFA 6104348 6369754 6646700 6068726 Enterprise value 25189528 NO of equity share 3000000 price per share 8.39

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