O You received no credit for this question in the previous attempt. Problem 12-2
ID: 2799224 • Letter: O
Question
O You received no credit for this question in the previous attempt. Problem 12-21 Firm Valuation Happy Times, Inc, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe's Party Supply. Happy Times currently has debt outstanding witha market value of $240 million and a YTM of 8 percent. The company's market capitalization is $280 million, and the required return on equity is 13 percent. Joe's currently has debt outstanding with a market value of $26.5 million. The EBIT for Joe's next year is projected to be $15 million. EBIT is expected to grow at 8 percent per year for the next five years before slowing to 4 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 7 percent, 13 percent, and 6 percent respectively. Joe's has 21 million shares outstanding, and the tax rate for both companies is 30 percent oints awarded Scored a. What is the maximum share price that Happy Times should be wailing to pay for Joe's? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) eBook Maximum share price $69.24 After examining your analysis, the CFO of Happy Times is uncomfortable using the perpetual growth rate in cash flows. Instead, she feels that the terminal value should be estimated using the EVIEBITDA multiple. The appropriate EV/EBITDA multiple is 8 Print b. What is your new estimate of the maximum share price for the purchase? (Do not round intermediate calculations and round your Reereneanswer to 2 decimal places. 9 3216.) Maximum share price SE7260 Reference linksExplanation / Answer
Terminal Value = EBITDA x Multiple = (21.22 + 1.27) x 8 = 179.976
Firm Value = NPV (WACC = 9.58%, 8.40...179.976) = $151.12
Equity = Firm Value - Debt = 151.12 - 26.5 = $124.62
Share Price = 124.62 / 2.1 = $59.34
1 2 3 4 5 6 EBIT 15.00 16.20 17.50 18.90 20.41 21.22 Dep. 0.90 0.97 1.05 1.13 1.22 1.27 NWC 1.05 1.13 1.22 1.32 1.43 1.49 Capex 1.95 2.11 2.27 2.46 2.65 2.76 FCF 8.40 9.07 9.80 10.58 11.43 11.89 TV 179.9764 NPV $151.12 Equity $124.62 Share $59.34Related Questions
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