Write a memorandum to mr zhang

Reference no: EM133393805

Case Study : Hooke - Corporate Finance

Zhang Supply Corp.

(1) Repurchase Idea

A. What is likely effect on the ZSC stock price, after the interest tax shield and the stock repurchase?
B. What is the repurchase's effect on ZSC's cost of equity and ZSC's level of risk?
C. What is the effect on ZSC earnings per shareEPS (year 2020) from the repurchase, as if the repurchase occurred on January 1, 2020? (i.e., you must pretend the repurchase occurred on January 1, 2020 for this "pro forma" calculation).
D. After the repurchase, do you think EPS will grow at a faster, or slower, rate in the future, compared to ZSC'spast history? Note that revenue growth will not change because of the repurchase.
E. Given your answer in D, in your opinion, what would be the effect on the current P/E ratio(13.2x) of ZSC from a repurchase? Consider the P/E ratios and growth rates of the similar companies set forth in Exhibits 7.
F. If you value the company after the repurchase, based on your opinion of the proper P/E ratio and the 2020pro forma EPS, what is the new stock price?

(2) Spinoff Idea Software (No Repurchase)

A. What is the likely market price per share (50 million shares) for the software business? Use DCF and Comparable Companies techniques as set forth in Value Method X and Y.
B. Value Method X:Discounted Free Cash Flow- 5 years forecast, (Dec. 31, 2020 to Dec. 31, 2025)
a. What is the approximate equity-cost-of-capital (discount rate) for Software to use in the DCF valuation?
b. What are your free-cash-flow forecasts for Software? Briefly explain your forecast assumptions.
c. What is the proper terminal value (or sales price for Software) on 12/31/2025for the DCF valuation? (You should look at the comparable firms' attributes, make any judgments for whether Software is better or worse than the comparable firms, and estimatethe EV/EBITDA ratio for Software terminal value in 2025.)
d. For the equity-cost-of-capital of Software, consider the Hamadaequation and the two comparable stocks. Seek Week 6 slides and Week 7slides.
C. Value Method Y:Comparable Companies- EV/EBITDA ratio at Dec. 31, 2020.
a. Consider the two comparable software stocks.
b. Should the Software business have the same or different value ratio?
c. Estimate the proper EV/EBITDA ratio for Software, and Software's stock price after a spinoff on December 31, 2020.

(3) Post-Spinoff-ZSC Share Value

A. You have determined the price of the Software spin off stock.
B. On a "pro forma" basis (as if), assuming a theoretical spin-off of Software on January 1, 2020, what would be the ZSC EPS for the year ending Dec. 31, 2020? (Hint: you subtract Software 2020results from ZSC parent 2020 results).
C. How do ZSC EPS results for 2020 change after a spin off.? How does the future growth profile of ZSC change after the Software spin off?
D. Would the "pro forma" ZSC (i) retain its current P/E ratio -assuming a spin-off occurs- (ii) or would the ZSC P/E ratio change? What is your opinion? The two comparable companies in Exhibit 7 are helpful for comparisons.
E. What revised P/E ratio do you think is appropriate for ZSC? You do not need a complex calculation. Provide reasonable explanation in words for your estimate. Your boss at Rhodes & Co. likes succinct explanations.

Ending Analysis

A. What is the value of (a) the post-spin-off ZSC share plus (+) (b) the value of the new Software share?

B. How does this (i) combined value compare to (ii) the pro forma ZSC share value under the Repurchase Idea?

Assignment

Write a memorandum to Mr. Zhang with your answers to these questions, your opinions, and your recommendations.

Include your calculations inside the memo or in a separate excel spreadsheet or another spreadsheet.

Please include your names and your group number in the memo.

Reference no: EM133393805

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