Reference no: EM133002054

-You run a profitable conglomerate thinking about getting into the gelati business by acquiring the firm Alati Gelati (AG). Current info for you, AG and their similar comp is listed below. You estimate that, once you own AG, it could immediately capture 3% market share of the gelati market of $10 billion. You also could enhance its other sales by 10%. You were planning on getting into the business yourself that would have increased your sales 15% -- instead now your sales will only increase 4% through synergies. These figures will be flat for the next five years then you expect long term growth from there at 5% per year forever on all line items. Margins will be such that COGS will be 60% of all sales. The acquired business will require an initial CAPX of $100 million, half of which will be expensed and the other half straight-line depreciated over the five years. The firm currently carries Depreciation of $15 million a year. At the end of year 5, maintenance CAPX needs to be spent to match that depreciation of $15 million. Operating expenses will be $10 million each year in addition to these depreciation figures. Net Working capital is always 5% of sales. There is an additional synergy: You could sell property that was housing a plant that is on your books for $100 million for a price of $75 million. Current overhead for AG is $20 million a year with half of that variable and the other half fixed so that would remain at $10 million whether you did the project or not. Your figures are flat for the five year horizon and then free cash flows are expected to grow at the 5% rate previously mentioned above.

Note: The corporate tax rate is 20%. Assume that all cash flows are year-end except for the up-front investment. You will finance the project appropriately with $10 million in A debt. Assume beta of debt = 0 and a market risk premium of 6.

You also have the following financial data pertaining to the market and to your publicly-traded competitors:

Treasury
Security Rate
3-month T-bill 3%
5-Year T-bond 4%
30-year T-bond 5%
A debt 10%

Your Firm Alati Gelati Gelateria Dondoli

Stock Price $50 $40 $20
Total Book Capitalization $800 Million $400 Million $400 Million
Leverage Ratio (Book) 20% 0% 10%
Shares Outstanding 22 Million 25 Million 40 Million
Cash $02 Million $0 Million $0 Million
Beta (from YahooFinance) 1.0 0.85 0.85
Total Sales $500 Million $250 Million $200 Million
Gelati Sales $0 Million $200 Million $180 Million

What is AG worth to you - that is what is its Value (use DCF)?