FINANCIAL MANAGEMENT
16th Edition
ISBN: 9781337902601
Author: Brigham
Publisher: CENGAGE L
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 22, Problem 11MC
Summary Introduction
Case summary: Company HH is a regional hardware chain which is considering acquiring Company LL. The boss of the company asked to place a value on target. There are 20 million shares @$12 per share with Company LL. Beta is 1.25 for Company LL’s stock with risk free rate 5.5% and market risk premium is 4%. 20% of capital structure of Company LL is financed with debt with 8% interest rate. Federal plus state tax rate is 25% and will remain same even after acquisition. The management of the Company HH is asking various questions about mergers and also asking to perform merger analysis based on the given details of Company LL.
To determine: The types of divestitures and the motivation due to which firm divest their assets.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Your firm is planning to invest in a new electrostatic power generation system. Ampthill Inc
is a firm that specializes in this business. Ampthill has a stock price of $25 per share with 20
million shares outstanding. Ampthill's equity beta is 1.4. It also has $220 million in debt
outstanding with a debt beta of 0.1. Your estimate of the asset beta for electrostatic power
generators is closest to
1.18
1
0.79
1.3
IDX Technologies is a privately held developer of advanced security systems based in Chicago. As part of your business development strategy, in late 2008 you initiate discussions with IDX's founder
about the possibility of acquiring the business at the end of 2008. Estimate the value of IDX per share using a discounted FCF approach and the following data:
• Debt: $23 million
• Excess cash: $106 million
• Shares outstanding: 50 million
Expected FCF in 2009: $47 million
Expected FCF in 2010: $57 million
• Future FCF growth rate beyond 2010: 5%
●
Weighted-average cost of capital: 9.4%
The enterprise value in 2008 is $
million. (Round to the nearest integer.)
Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe's Party Supply. Happy Times currently has debt outstanding with a market value of $220 million and a YTM of 5.8 percent. The company's market capitalization is $460 million and the required return on equity is 12 percent. Joe's currently has debt outstanding with a market value of $34.5 million. The EBIT for Joe's next year is projected to be $14 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. Joe's has 2.25 million shares outstanding and the tax rate for both companies is 23 percent. a. What is the maximum share price that Happy Times should be willing to pay for…
Chapter 22 Solutions
FINANCIAL MANAGEMENT
Ch. 22 - Prob. 1QCh. 22 - Prob. 2QCh. 22 - Prob. 3QCh. 22 - Prob. 4QCh. 22 - Prob. 5QCh. 22 - Prob. 1PCh. 22 - Prob. 2PCh. 22 - Prob. 3PCh. 22 - Hasting Corporation is interested in acquiring...Ch. 22 - Prob. 5P
Ch. 22 - Prob. 6PCh. 22 - Prob. 7SPCh. 22 - Prob. 1MCCh. 22 - Hager’s Home Repair Company, a regional hardware...Ch. 22 - Hager’s Home Repair Company, a regional hardware...Ch. 22 - Hager’s Home Repair Company, a regional hardware...Ch. 22 - Prob. 5MCCh. 22 - Prob. 6MCCh. 22 - Prob. 7MCCh. 22 - Prob. 8MCCh. 22 - Prob. 9MCCh. 22 - Prob. 10MCCh. 22 - Prob. 11MCCh. 22 - Prob. 12MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Hager’s Home Repair Company, a regional hardware chain, which specializes in “do-it-yourself” materials and equipment rentals, is considering an acquisition of Lyon Lighting (LL). Doug Zona, Hager’s treasurer and your boss, has been asked to place a value on the target and he has enlisted your help. LL has 20 million shares of stock trading at $12 per share. Security analysts estimate LL’s beta to be 1.25. The risk-free rate is 5.5% and the market risk premium is 4%. LL’s capital structure is 20% financed with debt at an 8% interest rate; any additional debt due to the acquisition also will have an 8% rate. LL has a 25% federal-plus-state tax rate, which will not change due to the acquisition. The following data incorporate expected synergies and required levels of total net operating capital for LL should Hager’s complete the acquisition. The forecasted interest expense includes the combined interest on LL’s existing debt and on new debt. After 2024, all items are expected to grow at a constant 6% rate. Note: aDebt is added on the first day of the year, so the 2019 debt is LL’s debt prior to the acquisition. Hager’s management is new to the merger game, so Zona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Zona has developed the following questions, which you must answer and then defend to Hager’s board: Briefly describe the differences between a hostile merger and a friendly merger.arrow_forwardHager’s Home Repair Company, a regional hardware chain, which specializes in “do-it-yourself” materials and equipment rentals, is considering an acquisition of Lyon Lighting (LL). Doug Zona, Hager’s treasurer and your boss, has been asked to place a value on the target and he has enlisted your help. LL has 20 million shares of stock trading at $12 per share. Security analysts estimate LL’s beta to be 1.25. The risk-free rate is 5.5% and the market risk premium is 4%. LL’s capital structure is 20% financed with debt at an 8% interest rate; any additional debt due to the acquisition also will have an 8% rate. LL has a 25% federal-plus-state tax rate, which will not change due to the acquisition. The following data incorporate expected synergies and required levels of total net operating capital for LL should Hager’s complete the acquisition. The forecasted interest expense includes the combined interest on LL’s existing debt and on new debt. After 2024, all items are expected to grow at a constant 6% rate. Note: aDebt is added on the first day of the year, so the 2019 debt is LL’s debt prior to the acquisition. Hager’s management is new to the merger game, so Zona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Zona has developed the following questions, which you must answer and then defend to Hager’s board: What are the steps in valuing a merger using the compressed APV approach?arrow_forwardHager’s Home Repair Company, a regional hardware chain, which specializes in “do-it-yourself” materials and equipment rentals, is considering an acquisition of Lyon Lighting (LL). Doug Zona, Hager’s treasurer and your boss, has been asked to place a value on the target and he has enlisted your help. LL has 20 million shares of stock trading at $12 per share. Security analysts estimate LL’s beta to be 1.25. The risk-free rate is 5.5% and the market risk premium is 4%. LL’s capital structure is 20% financed with debt at an 8% interest rate; any additional debt due to the acquisition also will have an 8% rate. LL has a 25% federal-plus-state tax rate, which will not change due to the acquisition. The following data incorporate expected synergies and required levels of total net operating capital for LL should Hager’s complete the acquisition. The forecasted interest expense includes the combined interest on LL’s existing debt and on new debt. After 2024, all items are expected to grow at a constant 6% rate. Note: aDebt is added on the first day of the year, so the 2019 debt is LL’s debt prior to the acquisition. Hager’s management is new to the merger game, so Zona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Zona has developed the following questions, which you must answer and then defend to Hager’s board: Why can’t we estimate LL’s value to Hager’s by discounting the FCFs at the WACC? What method is appropriate? Use the projections and other data to determine the LL division’s free cash flows and interest tax savings for 2020 through 2024. Notice that the LL division’s sales are expected to grow rapidly during the first years before leveling off at a sustainable long-term growth rate.arrow_forward
- Vijayarrow_forwardHappy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $200 million and a YTM of 5.8 percent. The company’s market capitalization is $440 million and the required return on equity is 11 percent. Joe’s currently has debt outstanding with a market value of $33.5 million. The EBIT for Joe’s next year is projected to be $13 million. EBIT is expected to grow at 8 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 7 percent, 13 percent, and 6 percent, respectively. Joe’s has 2.15 million shares outstanding and the tax rate for both companies is 21 percent. a.What is the maximum share price that Happy Times should be willing to pay for…arrow_forwardHappy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $200 million and a YTM of 5.8 percent. The company’s market capitalization is $440 million and the required return on equity is 11 percent. Joe’s currently has debt outstanding with a market value of $33.5 million. The EBIT for Joe’s next year is projected to be $13 million. EBIT is expected to grow at 8 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 7 percent, 13 percent, and 6 percent, respectively. Joe’s has 2.15 million shares outstanding and the tax rate for both companies is 21 percent. a. What is the maximum share price that Happy Times should be willing to pay for…arrow_forward
- Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times 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. Joe’s currently has debt outstanding with a market value of $25.5 million. The EBIT for Joe’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. Joe’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 Happy Times should be willing to pay for…arrow_forward2. An analyst for Acme, R. Runner, has recommended that Peter the Anteater purchase shares in a private firm (a firm that is not traded on any exchange) called Dynamite Corp. Dynamite has 30% debt and 70% equity. R. Runner believes that Dynamite will generate a return of 10% over the next year. Since Y. Lee is new to the job, he decides to do a little research on his own. He finds a company, Explosions Unlimited, that has very similar business as Dynamite. Explosions has an equity beta of 1.05 and is composed of 40% debt and 60% equity. Should Peter the Anteater buy the stock? The expected return on the market is 12% and the expected risk-free rate is 5%.arrow_forwardHappy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe's Party Supply. Happy Times currently has debt outstanding with a market value of $150 million and a YTM of 4.9 percent. The company's market capitalization is $390 million and the required return on equity is 10 percent. Joe's currently has debt outstanding with a market value of $31 million. The EBIT for Joe's next year is projected to be $12 million. EBIT is expected to grow at 9 percent per year for the next five years before slowing to 2 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 8 percent, 14 percent, and 7 percent, respectively. Joe's has 1.9 million shares outstanding and the tax rate for both companies is 21 percent. a. What is the maximum share price that Happy Times should be willing to pay for…arrow_forward
- Your company is rapidly growing and needs additional capital to expand the online retailing portion of its business model. One group of the board of directors proposes that the company issue $800,000 of additional common stock, while a separate group of the board is in favor of issuing the same amount of long-term bonds. As a possible compromise, the company’s investment banker suggests that the company issue convertible bonds. The board asks you to write a memo examining the advantages and disadvantages of convertible bonds. The company currently has 200,000 common shares outstanding, and the stock is currently trading at a price of $30 per share. The company’s effective interest rate is 10%; however, the investment banker believes that the convertible debt could be issued at a 6% interest rate. Write a memo to the board of directors detailing how convertible bonds work and the advantages and disadvantages of the security. In addition, provide details on how the issuance of the…arrow_forwardBhupatbhaiarrow_forwardYou work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel. Associated Steel's stock price is $20 and it has 10 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 100%. You are planning on doing a leveraged buyout of Associated Steel, and will offer $20 per share for control of the company. Assuming that you use equity (your own money) to pay for this deal, what will be your gain from the deal? What about other shareholders? Now assume you use debt to finance the deal. How does this change your gains vs. other shareholders when compared to part (B)?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY