Ham, Incorporated, wants to expand its party stores into the South. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held A's Supply. Ham currently has debt outstanding with a market value of $120 million and a YTM of 6.8 percent. The company's market capitalization is $260 million and the required return on equity is 15 percent. A's currently has debt outstanding with a market value of $25.5 million. The EBIT for A's next year is projected to be $17 million. EBIT is expected to grow at 10 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 9 percent, 15 percent, and 8 percent, respectively. A's has 2.15 million shares outstanding and the tax rate for both companies is 25 percent.
Ham, Incorporated, wants to expand its party stores into the South. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held A's Supply. Ham currently has debt outstanding with a market value of $120 million and a YTM of 6.8 percent. The company's market capitalization is $260 million and the required return on equity is 15 percent. A's currently has debt outstanding with a market value of $25.5 million. The EBIT for A's next year is projected to be $17 million. EBIT is expected to grow at 10 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 9 percent, 15 percent, and 8 percent, respectively. A's has 2.15 million shares outstanding and the tax rate for both companies is 25 percent.
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
Problem 1PS
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Vijay
Transcribed Image Text:Ham, Incorporated, wants to expand its party stores into the South. In order to establish an
immediate presence in the area, the company is considering the purchase of the privately held A's
Supply. Ham currently has debt outstanding with a market value of $120 million and a YTM of
6.8 percent. The company's market capitalization is $260 million and the required return on equity
is 15 percent. A's currently has debt outstanding with a market value of $25.5 million. The EBIT
for A's next year is projected to be $17 million. EBIT is expected to grow at 10 percent per year
for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital
spending, and depreciation as a percentage of EBIT are expected to be 9 percent, 15 percent, and
8 percent, respectively. A's has 2.15 million shares outstanding and the tax rate for both
companies is 25 percent.
a. What is the maximum share price that Ham, Inc should be willing to pay for A's? (Do not
round intermediate calculations and round your answer to 2 decimal places, e.g.,
32.16.)
b. After examining your analysis, the CFO of Ham, Inc. is uncomfortable using the perpetual
growth rate in cash flows. Instead, she feels that the terminal value should be estimated using
the EV/EBITDA multiple. The appropriate EV/EBITDA multiple is 8. What is your new
estimate of the maximum share price for the purchase? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
a. Maximum share price
b. Maximum share price
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