Deck 9: Business Valuation and Corporate Restructuring

Question 1

Estimate BSL's value (in $ millions)at the end of 2010 assuming it is worth the book value of its assets at the end of 2015.Macklemore's WACC is 8.0 percent.BSL's WACC is 11.5 percent,and the average of the two companies' WACCs,weighted by sales,is 8.2 percent.

A) $628.24
B) $3,669.01
C) $4,297.25
D) $4,412.94
E) $4,984.28
F) None of the above.

Answer 1

$4,297.25

Question 2

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share.The number of outstanding shares at the time of the announcement was 82 million.The book value of liabilities on the balance sheet of Slick Co.was $1.46 billion.What was the cost of this acquisition to the shareholders of Ginormous Oil?

A) $1.46 billion
B) $3.46 billion
C) $4.92 billion
D) $6.38 billion
E) $8.38 billion
F) None of the above.

Answer 2

$6.38 billion

Question 3

The following information is available about Chiantivino Corp.(CC):
An activist investor is confident that by terminating CC's money-losing fortified wine division,she can increase free cash flow by $4 million annually for the next decade.In addition,she estimates that an immediate,special dividend of $10 million can be financed by the sale of the division.
a.Assuming these actions do not affect CC's cost of capital,what is the maximum price per share the investor would be justified in bidding for control of CC?
What percentage premium does this represent?
b.Show your answer if you conduct a sensitivity analysis by assuming the cost of capital is 15 percent and the increased cash flow is only $3.5 million per year.

Answer 3

a.The maximum justifiable premium = the fair market value of CC under new management - the fair market value of CC under existing management.A plausible estimate of CC's fair market value under existing management is its standalone value = current market value of firm = $8 x 10 million + 75 million = $155 million.
Fair market value under new management = $155 million + present value of enhancements = $155 million + present value of a $4 million annuity for 10 years at 14% + $10 million from sale of the division.
b.Fair market value = $155 million + $4 million x 5.216 + $10 million = $185.86.Fair market value of equity = $185.86 - 75 = $110.86.Fair market of equity per share = $110.86/10 = $11.09.This is a 38.6% premium over the existing $8 share price.
Fair market value of the firm assuming a 15 percent discount rate and a $3.5 million annuity = 155 + 3.5(5.019)+ 10 = $182.57 million.Value of equity = 182.57 - 75 = 107.57.Value per share = 107.57/10 = $10.76.This is a 34.5% premium over the existing price.

Question 4

Estimate the present value of BSL's free cash flow (in $ millions)for the years 2011 - 2015.Macklemore's WACC is 8.0 percent.BSL's WACC is 11.5 percent,and the average of the two companies' WACCs,weighted by sales,is 8.2 percent.

A) - $1.29
B) $628.24
C) $720.58
D) $726.68
E) $743.94
F) None of the above.

Question 5

Which of the following statements are correct?
I.Liquidation value of a firm is equal to the present worth of expected future cash flows from operating activities.
II.When an acquiring firm purchases a target firm's equity,the acquirer must assume the target's liabilities.
III.The market value of a public company reflects the worth of the business to minority investors.
IV.The fair market value of a business is usually the lower of its liquidation value and its going-concern value.

A) I and III only
B) II and IV only
C) II and III only
D) I, II, and III only
E) II, III, and IV only
F) None of the above.

Question 6

Below is a recent income statement for Gatlin Camera:
Calculate Gatlin's free cash flow in this year assuming it spent $510 on new capital equipment and increased current assets net of noninterest-bearing current liabilities $340.

Question 7

Which of the following statements are correct?
I.Going-concern value of a firm is equal to the present value of expected future cash flows to owners and creditors.
II.When an acquiring firm purchases a target firm's equity,the acquirer need not assume the target's liabilities.
III.The market value of a public company reflects the worth of the business to minority investors.
IV.The fair market value of a business is usually the lower of its liquidation value and its going-concern value.

A) I and III only
B) II and IV only
C) II and III only
D) I, II, and III only
E) II, III, and IV only
F) None of the above.

Question 8

The following table presents forecasted financial and other information for Scott's Miracle-Gro Co.: What is an appropriate estimate of Scott's terminal value of equity as of the end of 2014?

A) $225 million
B) $3,833.0 million
C) $4,207.5 million
D) $4,365.0 million
E) $6,788.1 million
F) None of the above.

Question 9

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share.The number of outstanding shares at the time of the announcement was 82 million.The book value of liabilities on the balance sheet of Slick Co.was $1.46 billion.Immediately prior to the Ginormous Oil bid,the shares of Slick Co.traded at $33 per share.What value did Ginormous Oil place on the control of Slick Co.?

A) $2.21 billion
B) $2.71 billion
C) $4.17 billion
D) $6.38 billion
E) None of the above.

Question 10

Which of the following statements is/are correct?
I.Going-concern value of a firm is equal to the present value of expected net income.
II.When a buyer values a target firm,the appropriate discount rate is the buyer's weighted-average cost of capital.
III.The liquidation value estimate of terminal value usually vastly understates a healthy company's terminal value.
IV.The value of a firm's equity equals the discounted cash flow value of the firm minus all liabilities.

A) II only
B) III only
C) I and II only
D) II and III only
E) II, III, and IV only
F) None of the above.

Question 11

Assume that in the years after 2015 the company's free cash flow grows 4 percent per year in perpetuity.Macklemore's WACC is 8.0 percent.BSL's WACC is 11.5 percent,and the average of the two companies' WACCs,weighted by sales,is 8.2 percent.What is the maximum acquisition price (in $ millions)Macklemore should pay to acquire BSL's equity at the end of 2010?

A) $1,976.09
B) $2,501.09
C) $2,877.09
D) $4,195.09
E) $4,571.09
F) None of the above.

Question 12

Estimate BSL's value (in $ millions)at the end of 2010 assuming that in the years after 2015 the company's free cash flow grows 4 percent per year in perpetuity.Macklemore's WACC is 8.0 percent.BSL's WACC is 11.5 percent,and the average of the two companies' WACCs,weighted by sales,is 8.2 percent.

A) $4,297.25
B) $4,571.09
C) $4,686.78
D) $6,181.09
E) $5,351.19
F) None of the above.

Question 13

Assume that at year-end 2015 the company's equity is worth 15 times earnings after tax and its debt is worth book value.Macklemore's WACC is 8.0 percent.BSL's WACC is 11.5 percent,and the average of the two companies' WACCs,weighted by sales,is 8.2 percent.What is the maximum acquisition price (in $ millions)Macklemore should pay to acquire BSL's equity at the end of 2010?

A) $3,484.68
B) $4,723.26
C) $4,938.06
D) $5,554.68
E) $6,343.26
F) None of the above.

Question 14

What is BSL's free cash flow (in $ millions)for 2011?

A) - $938
B) - $792
C) - $7
D) $122
E) $1,091
F) None of the above.

Question 15

Atmosphere,Inc.has offered $860 million cash for all of the common stock in ACE Corporation.Based on recent market information,ACE is worth $710 million as an independent operation.For the merger to make economic sense for Atmosphere,what would the minimum estimated value of the enhancements from the merger have to be?

A) $0
B) $75 million
C) $150 million
D) $710 million
E) $860 million
F) None of the above.

Question 16

Estimate BSL's value (in $ millions)at the end of 2010 assuming that at year-end 2015 the company's equity is worth 15 times earnings after tax and its debt is worth book value.Macklemore's WACC is 8.0 percent.BSL's WACC is 11.5 percent,and the average of the two companies' WACCs,weighted by sales,is 8.2 percent.

A) $628.24
B) $3,669.01
C) $7,429.74
D) $6,343.26
E) $6,755.83
F) None of the above.

Question 17

Consider the following premerger information about a bidding firm (Buyitall Inc.)and a target firm (Tarjay Corp.).Assume that neither firm has any debt outstanding. Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600.What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash?

A) $400
B) $600
C) $1,800
D) $2,200
E) $2,600
F) None of the above.

Question 18

The following table presents forecasted financial and other information for Scott's Miracle-Gro Co.: What is an appropriate estimate of Scott's terminal value as of the end of 2014,using the perpetual-growth equation as your estimate?

A) $161 million
B) $363 million
C) $3,690 million
D) $3,838 million
E) $5,357 million
F) None of the above.

Question 19

The following table presents forecasted financial and other information for Scott's Miracle-Gro Co.: What is an appropriate estimate of Scott's terminal value as of the end of 2014,using a warranted multiple of free cash flow as your estimate?

A) $155 million
B) $2,898.5 million
C) $3,007.0 million
D) $4,365.0 million
E) $7,042.2 million

Question 20

Assume BSL is worth the book value of its assets at the end of 2015.Macklemore's WACC is 8.0 percent.BSL's WACC is 11.5 percent,and the average of the two companies' WACCs,weighted by sales,is 8.2 percent.What is the maximum acquisition price (in $ millions)Macklemore should pay to acquire BSL's equity?

A) $1,702.25
B) $2,227.25
C) $2,342.94
D) $2,383.94
E) $2,603.25
F) None of the above.

Question 21

The following table presents a four-year forecast for Kenmore Air, Inc.:

Estimate the fair market value of Kenmore Air at the end of 2012.Assume that after 2016,earnings before interest and tax will remain constant at $200 million,depreciation will equal capital expenditures in each year,and working capital will not change.Kenmore Air's weighted-average cost of capital is 11 percent and its tax rate is 40 percent.

Question 22

Empirical evidence indicates that the returns to shareholders of the target firm vary significantly from the returns to the shareholders of the acquiring firm.Identify the shareholders that tend to realize the smaller return.Does your answer depend on the way the acquisition is financed?

Question 23

The following table presents a four-year forecast for Kenmore Air, Inc.:

Estimate the fair market value of Kenmore Air's equity per share at the end of 2012 under the following assumptions:
a.EBIT in year 2016 is $200 million,and then grows at 5 percent per year forever.
b.To support the perpetual growth in EBIT,capital expenditures in year 2017 exceed depreciation by $30 million,and this difference grows 5 percent per year forever.
c.Similarly,working capital investments are $15 million in 2017,and this amount grows 5 percent per year forever.

Question 24

Ametek,Inc.is a billion dollar manufacturer of electronic instruments and motors headquartered in Paoli,Pennsylvania.Use the following information on Ametek and five other similar companies to value Ametek,Inc.on December 31,2010.

Question 25

Rainy City Coffee's (RCC)free cash flow next year will be $100 million and it is expected to grow at a 4 percent annual rate indefinitely.The company's weighted average cost of capital is 10 percent,the market value of its liabilities is $1 billion,and it has 20 million shares outstanding.
a.Estimate the price per share of RCC's common stock.
b.A hedge fund believes that by selling the company's private jet and instituting other cost savings,it can increase RCC's free cash flow next year to $110 million and can add a full percentage point to RCC's growth rate without affecting its cost of capital.What is the maximum price per share the hedge fund can justify bidding for control of RCC?

Question 26

The following table presents a four-year forecast for Kenmore Air, Inc.:

Estimate the fair market value per share of Kenmore Air's equity at the end of 2016 if the company has 40 million shares outstanding and the market value of its interest-bearing liabilities on the valuation date equals $250 million.

Question 27

The following table presents a four-year forecast for Kenmore Air, Inc.:

Estimate the fair market value of Kenmore Air's equity per share at the end of 2012 under the following assumptions:
a.EBIT in year 2016 will be $200 million.
b.At year-end 2016,Kenmore Air has reached maturity,and analysts expect its equity will sell for 12 times year 2016 net income.
c.At year-end 2016,Kenmore Air has $250 million of interest-bearing liabilities outstanding at an average interest rate of 10 percent.