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    Finance: Should company A make a deal if its policy is to never exceed a 20% premium in any tender offer?

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    Company A is considering the acquisition of a firm in the Czech
    Republic with a plan to operate the
    firm for 3 years and then reevaluate the holding with the below estimations

    Free Cash flows are estimated as follows:

    Year 1 - 38.63M Czech Koruna (CZK), Year 2 - 44.33 M CZK,
    Year 3 - 50.48M CZK
    The third year terminal value is estimated at 375M CZK.
    The Czech Koruna's exchange rate is assumed to be .038 USD/CZK for
    each year. Company A uses a WACC of 13 % for its domestic projects. So, the
    PV of the FCF's for the firm is 363.78 M CZK or $13.82M. The Czech
    firm has 1,000,000 shares outstanding and a debt to equity ratio of
    1:1. Current market price is 185 CZK per share.

    All monetary information (except per share) should be presented in CZK
    millions (i.e., do not convert to USD).

    Should company A make a deal if its policy is to never exceed a 20% premium
    in any tender offer? To defend your position, you must prepare and
    present an Excel template that includes the calculated fair value
    premium over market.
    What changes in the analysis or additional analysis do you suggest
    before a final decision should be made?
    Using the DCF methodology required in question 1, please take one of
    your suggestions and reevaluate the buy-out. To complete this
    question, you will have to present a second Excel template that
    includes your new assumed values and supports your recommendations.
    Further, please comply with the following:
    Assumptions must be reasonable - i.e., don't select arbitrary values.
    Some discussion should be provided that explains how you arrived at
    your new assumed values.
    Variable changes should be restricted to the discount rate, the FCFs,
    and/or the terminal value. Please present only one set of assumptions
    (e.g., do not submit a table that includes multiple values for the
    same variables.)

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    Solution Preview

    The figures that have been given to you in the question have been given in the first calculation in the excel sheet. That is the WACC rate of 13% has been taken as the discount rate. The net present value calculated gives us exactly the figure of 363.78 that is given to you by the problem.. Next we are forced to presuppose that the 1,000,000 shares have been issued at the price of CZK 1 and so the debt of the company is 1 million CZK. Please remember that the debt equity ratio has been given to us as 1:1. So, if you presume that the 1,000,000 shares have been issued at CZK 10 then the debt of the company will be 10 million. However, since the value of the debt is not what we have been allowed to change by the problem. This debt has to be reduced from the present value that has been calculated. This deduction is shown in the second last column of the excel sheet. Then in the last column of the excel sheet we calculate the greatest price that the ...

    Solution Summary

    Discussion is 286 words plus computations completed in excel for student to use as a template for future assignments.