Company is considering the purchase of privately held

Assignment Help Financial Management
Reference no: EM131561462

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 with a market value of $240 million and a YTM of 9 percent. The company’s market capitalization is $360 million, and the required return on equity is 14 percent. Joe’s currently has debt outstanding with a market value of $35.5 million. The EBIT for Joe’s next year is projected to be $16 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 2.35 million shares outstanding and the tax rate for both companies is 30 percent.

a. What is the maximum share price that Happy Times should be willing to pay for Joe’s?

Maximum share price $   

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 EV/EBITDA multiple. The appropriate EV/EBITDA multiple is 8.

b. What is your new estimate of the maximum share price for the purchase?

Reference no: EM131561462

Questions Cloud

What would firm total market value be if it make this change : As a consultant to First Responder Inc., you have obtained the following data. What would firm's total market value be if it makes this change.
Change in wacc affect the project forecasted npv : Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. By how much did the change in the WACC affect the project's forecasted NPV?
Define abstraction programming language : C++ is another computer programming language. In addition, C is foundation for C++ as well. Bjarne Stroustrup developed C++. This was in 1980's.
Money will they get to keep from this sale as inheritance : A borrower obtains a reverse annuity mortgage (RAM) with a 5% fixed rate. How much money will they get to keep from this sale as an inheritance?
Company is considering the purchase of privately held : In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply.
Has dollar bill financing cycle improved : DOLLAR BILL'S, a retail store in New York City, buys its inventory on credit. All other factors remain the same. Has DOLLAR BILL’S financing cycle improved.
Estimate for the project before its npv becomes negative : What is the net present value of the project? What is the highest possible beta estimate for the project before its NPV becomes negative?
Considering replacing your old nissan with new hyundai : Assume that you are considering replacing your old Nissan with a new Hyundai. When should you replace it with the new Hyundai in this case?
What is the effect on the project npv : After estimating a project’s NPV, the analyst is advised that the fixed capital outlay will be revised upward by $100,000. What is effect on the project NPV?

Reviews

Write a Review

Financial Management Questions & Answers

  Estimate of the stocks current price

A company currently pays a dividend of $3.5 per share (D0 = $3.5). It is estimated that the company's dividend will grow at a rate of 16% per year for the next 2 years, then at a constant rate of 8% thereafter. The company's stock has a beta of 2, th..

  Assets-interest rate-response to change in capital structure

Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets (which is equal to its total invested capital) to be $200,000, and its tax rate to be 35%. Assuming t..

  Black-scholes model to value put options on the stock

An analyst is interested in using the Black-Scholes model to value put options on the stock of Marble LTD.

  Calculate initial investment cash flows for this project

A 6 year capital projcect, code name Jackal, costs $27,695 (year 0). It is expected to produce the following operating cash flows (revenues minus expenses) Calculate the initial investment (year 0) cash flows for this project. If the Condor project h..

  Calculate the risk-neutral probabilities

Calculate the risk-neutral probabilities and value the call using the risk-neutral probabilities. Verify that same price for put results from put-call parity.

  What is discounted payback period and profitability index

The required return is 10% and the required payback is 4 years. What is the discounted payback period? What is the profitability index?

  About the percentage change in price of bond

Bond J has a coupon rate of 7 percent and Bond K has a coupon rate of 13 percent. Both bonds have 20 years to maturity, make semiannual payments, and have a YTM of 10 percent. If interest rates suddenly rise by 2 percent, what is the percentage price..

  Cases in financial management

Cenage.com has a E-book titled "Cases in Financial Management by Brigham, Gapenski, and Klein” Hardin expects both the sales and production managers to question her assumptions, so she would like to know which variables are most critical in the sense..

  Risks would floating-rate bond tend

A company has a fixed-rate semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond? Which one of the following risks would a floating-rate bond tend to have less of com..

  You need to raise in order to build your shipping terminal

Suppose your firm needs to raise $10.5 million to construct a new shipping terminal. As CFO, you plan to raise funds in the following manner: 60% of the funds will be raised by selling long term debt (bonds). 40% of the funds will be raised by retain..

  The firm is considering investing in new project

The firm is considering investing in a new project. The target debt ratio is 45%. The stockholders require a 14% return for the project’s level of market risk. If the required return on the firm’s debt is 5% and the firm’s tax rate is 20% what is the..

  What must the coupon rate be on merton bonds

Merton Enterprises has bonds on the market making annual payments, with 16 years to maturity, and selling for $957. At this price, the bonds yield 9 percent. Required: What must the coupon rate be on Merton’s bonds?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd