Find the implied growth rate applied by lenovo assuming

Assignment Help Financial Management

Reference no: EM132065158

In Dec 2004, Lenovo acquired all operating assets of IBM’s PC division at the price of $1.25 billion. The transaction was completed in friendly terms, including Lenovo agreeing to retain all IBM employees and IBM agreeing to contribute during the post-acquisition transition period. Lenovo assumed that there was zero debt in its valuation of IBM’s PC division. At the time of acquisition, an independent financial analyst from an investment bank made the following projections regarding IBM’s PC division, with regards to post-acquisition estimates:

• The sales revenue of the IBM PC division independent of the acquisition was expected to grow at 2% in 2005 and be maintained in perpetuity.

• The acquisition would bring an additional 1.5% perpetual sales growth due to the synergies from the collaboration between IBM and Lenovo. • The acquisition is expected to reduce 12% of total operating expenses each year.

• The gross profit margin (gross profit over sales) will be 12% in 2005.

• Operating expenses including tax expense will be 7% of sales.

• Residual earnings are expected to grow at 4% in 2005 and in perpetuity.

• The PC business has a CAPM beta of 1.1, the risk-free rate is 4.5%, and the market risk premium is 7%.

The analyst also estimated the following key financials for IBM’s PC division as at Dec 2004:

(i) Revenue during Dec 2003 – Dec 2004 = $10,081.69 million,

(ii) working operating capital = $849.62 million,

(iii) non-current operating assets = $3,379.32 million,

(iv) net income 2003-2004 = –117.2 million

Required

(a) Compute the ‘fair price’ for IBM’s PC division at the time of acquisition. Use the residual operating income (ReOI) model. Did Lenovo overpay?

(b) Lenovo paid $1.25 billion as fair price. Suppose Lenovo’s estimates are consistent to those above. Find the discount rate Lenovo used to value IBM’s PC division.

(c) Find the implied growth rate applied by Lenovo assuming that the analyst’s estimates for the required rate of rate are correct.

Reference no: EM132065158

Questions Cloud

What is the cost of common equity capital : If the price of Seerex common stock is $19.11, what is the cost of its common equity capital?

Shares of common stock outstanding-what is the company wacc : Dinklage Corp. has 7 million shares of common stock outstanding. What is the company’s WACC?

What is aftertax cost of debt : What is the aftertax cost of debt? What is the company’s WACC?

What is the current ytm of bonds and after-tax cost of debt : What is the current YTM of the bonds and after-tax cost of debt for this firm if the bonds are selling at par?

Find the implied growth rate applied by lenovo assuming : Find the implied growth rate applied by Lenovo assuming that the analyst’s estimates for the required rate of rate are correct.

What is the equivalent uniform annual worth of this system : Ms. Child is considering the purchase of a new food packaging system. What is the equivalent uniform annual worth (EUAW) of this system?

What is your effective annual interest rate : You are offered an investment with a quoted annual interest rate of 12.5% with quarterly compounding of interest. What is your effective annual interest rate?

What is the equivalent uniform annual worth : What is the equivalent uniform annual worth (EUAW) of this car at a 2% interest rate?

Exchange rate relationships between the US dollar and euro : Exchange rate relationships between the U.S. dollar and the euro have been volatile.

User Account

All Pages