A sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility of the desired size and to attain capacity operations would cost $1,000 million in present value terms. Alternatively, the company could acquire an existing firm or division with the desired capacity. One such opportunity is a division of another company. The book value of the division's assets is $900 million and its earnings before interest and tax are presently $115 million. Publicly traded comparable companies are selling in a narrow range around 12 times current earnings. These companies have book value debt-to-asset ratios averaging 40 percent with an average interest rate of 10 percent. a. Using a tax rate of 36 percent, estimate the minimum price the owner of the division should consider for its sale. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place. Minimum price million
A sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility of the desired size and to attain capacity operations would cost $1,000 million in present value terms. Alternatively, the company could acquire an existing firm or division with the desired capacity. One such opportunity is a division of another company. The book value of the division's assets is $900 million and its earnings before interest and tax are presently $115 million. Publicly traded comparable companies are selling in a narrow range around 12 times current earnings. These companies have book value debt-to-asset ratios averaging 40 percent with an average interest rate of 10 percent. a. Using a tax rate of 36 percent, estimate the minimum price the owner of the division should consider for its sale. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place. Minimum price million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:A sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility
of the desired size and to attain capacity operations would cost $1,000 million in present value terms. Alternatively, the company could
acquire an existing firm or division with the desired capacity. One such opportunity is a division of another company. The book value of
the division's assets is $900 million and its earnings before interest and tax are presently $115 million. Publicly traded comparable
companies are selling in a narrow range around 12 times current earnings. These companies have book value debt-to-asset ratios
averaging 40 percent with an average interest rate of 10 percent.
a. Using a tax rate of 36 percent, estimate the minimum price the owner of the division should consider for its sale.
Note: Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.
Minimum price
million
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