5. Merger analysis - Free cash flow to equity (FCFE) approach Consider the following acquisition data regarding Sunny Squirrel Fabricators Inc. and Purple Turtle Corp.: Sunny Squirrel Fabricators Inc. is considering an acquisition of Purple Turtle Corp. Sunny Squirrel Fabricators Inc. estimates that acquiring Purple Turtle will result in incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company. Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $16.0 $19.2 $24.0 Interest expense 5.0 5.5 6.0 Debt 31.9 37.7 40.6 Total net operating capital 121.5 123.9 126.3 Purple Turtle is a publicly traded company, and its market-determined pre-merger beta is 1.40. You also have the following information about the company and the projected statements. • Purple Turtle currently has an $18.00 million market value of equity and $11.70 million in debt. The risk-free rate is 3% with a 5.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity rs of 10.14%. • Purple Turtle's cost of debt is 5.00% at a tax rate of 30%. • The projections assume that the company will have a post-horizon growth rate of 4.00%. • Current total net operating capital is $118.0 million, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $29 million. • The firm has no nonoperating assets, such as marketable securities. With the given information, use the free cash flow to equity (FCFE) approach to calculate the following values involved in the merger analysis. (Note: Round your answer to two decimal places.) Options for FCFE horizon value: Options for Value of FCFE: Value (a) $221.89 million (a) $193.04 million (b) $211.56 million (b) $210.34 million FCFE horizon value $221.89 million Value of FCFE (c) $233.02 million (d) $234.99 million (c) $193.33 million (d) $47.56 million

5. Merger analysis - Free cash flow to equity (FCFE) approach Consider the following acquisition data regarding Sunny Squirrel Fabricators Inc. and Purple Turtle Corp.: Sunny Squirrel Fabricators Inc. is considering an acquisition of Purple Turtle Corp. Sunny Squirrel Fabricators Inc. estimates that acquiring Purple Turtle will result in incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company. Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $16.0 $19.2 $24.0 Interest expense 5.0 5.5 6.0 Debt 31.9 37.7 40.6 Total net operating capital 121.5 123.9 126.3 Purple Turtle is a publicly traded company, and its market-determined pre-merger beta is 1.40. You also have the following information about the company and the projected statements. • Purple Turtle currently has an $18.00 million market value of equity and $11.70 million in debt. The risk-free rate is 3% with a 5.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity rs of 10.14%. • Purple Turtle's cost of debt is 5.00% at a tax rate of 30%. • The projections assume that the company will have a post-horizon growth rate of 4.00%. • Current total net operating capital is $118.0 million, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $29 million. • The firm has no nonoperating assets, such as marketable securities. With the given information, use the free cash flow to equity (FCFE) approach to calculate the following values involved in the merger analysis. (Note: Round your answer to two decimal places.) Options for FCFE horizon value: Options for Value of FCFE: Value (a) $221.89 million (a) $193.04 million (b) $211.56 million (b) $210.34 million FCFE horizon value $221.89 million Value of FCFE (c) $233.02 million (d) $234.99 million (c) $193.33 million (d) $47.56 million

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter23: Corporate Restructuring

Section: Chapter Questions

Problem 7P

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