Home Appliances, a large appliance manufacturer, is considering an acquisition of Modern Design, a medium appliance manufacturer. You have been provided with the following information: Home Appliances Modern Design After-tax operating income next year Debt capital ratio Cost of debt $20 million $10 million 20% 4% $6 million 0% Net Capex + ANWC $1.5 million Both companies are in stable growth, growing at 3% a year. The appliance sector has an unlevered beta of 0.8 for large firms and 1 for small and medium size firms. The marginal tax rate for all firms is 30%. Assume constant D/E ratio to both firms in the equilibrium. The risk-free rate is 3%, and the expected market risk premium is 6%. a. What is the Enterprise Value of Home Appliance as a stand-alone company? b. What is the Enterprise Value of Modern Design as a stand-alone company? c. Home Appliance plans to acquire the entire firm of Modern Design and integrate it into its own business. It will pay a 30% premium on the owner's estimated value ( from part b) and use a 20% debt-to-capital ratio (with the cost of debt remaining at 4%) to finance the acquisition. Estimate the value of Home Appliance after the transaction. How would you expect Home Appliance's stock price to change upon the announcement?
Home Appliances, a large appliance manufacturer, is considering an acquisition of Modern Design, a medium appliance manufacturer. You have been provided with the following information: Home Appliances Modern Design After-tax operating income next year Debt capital ratio Cost of debt $20 million $10 million 20% 4% $6 million 0% Net Capex + ANWC $1.5 million Both companies are in stable growth, growing at 3% a year. The appliance sector has an unlevered beta of 0.8 for large firms and 1 for small and medium size firms. The marginal tax rate for all firms is 30%. Assume constant D/E ratio to both firms in the equilibrium. The risk-free rate is 3%, and the expected market risk premium is 6%. a. What is the Enterprise Value of Home Appliance as a stand-alone company? b. What is the Enterprise Value of Modern Design as a stand-alone company? c. Home Appliance plans to acquire the entire firm of Modern Design and integrate it into its own business. It will pay a 30% premium on the owner's estimated value ( from part b) and use a 20% debt-to-capital ratio (with the cost of debt remaining at 4%) to finance the acquisition. Estimate the value of Home Appliance after the transaction. How would you expect Home Appliance's stock price to change upon the announcement?
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:Home Appliances, a large appliance manufacturer, is considering an acquisition of Modern Design, a medium
appliance manufacturer.
You have been provided with the following information:
Home
Modern Design
Appliances
After-tax operating income
next year
Debt capital ratio
$20 million
$10 million
20%
0%
Cost of debt
4%
Net Capex + ANWC
$6 million
$1.5 million
Both companies are in stable growth, growing at 3% a year.
The appliance sector has an unlevered beta of 0.8 for large firms and 1 for small and medium size firms.
The marginal tax rate for all firms is 30%. Assume constant D/E ratio to both firms in the equilibrium.
The risk-free rate is 3%, and the expected market risk premium is 6%.
a. What is the Enterprise Value of Home Appliance as a stand-alone company?
b. What is the Enterprise Value of Modern Design as a stand-alone company?
c. Home Appliance plans to acquire the entire firm of Modern Design and integrate it into its own business.
It will pay a 30% premium on the owner's estimated value ( from part b) and use a 20% debt-to-capital
ratio (with the cost of debt remaining at 4%) to finance the acquisition.
Estimate the value of Home Appliance after the transaction.
How would you expect Home Appliance's stock price to change upon the announcement?
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