Value-Based Management - Acquisition Values
Not what you're looking for?
You have been hired as a consultant to Kulpa Fishing Supplies (KFS), a company that is seeking you increase its value. The company's CEO and founder, Mia Kulpa, has asked you to estimate the value of two privately held companies that KFS is considering acquiring.
The first acquisition target is a privately held company in a mature industry. The company currently has free cash flow of $20 million. Its WACC is 10% and it is expected to grow at a constant rate of 5%. The company has marketable securities of $100 million. It is financed with $200 million of debt, $50 million of preferred stock, and $210 million of book equity.
1. What is its value of operations?
2. What is its total corporate value? What is its value of equity?
3. What is its MVA (MVA = Total corporate value - Total book value)?
The second acquisition target is a privately held company in a growing industry. The target has recently borrowed $40 million to finance its expansion; it has no other debt or preferred stock. It pays no dividends and currently has no marketable securities. KFS expects the company to produce free cash flows of -$5 million in 1 year, $10 million in 2 years, and $20 million in 3 years. After 3 years, free cash flow will grow at a rate of 6%. It's WACC is 10% and it currently has 10 million shares of stock.
1. What is its horizontal value (that is, its value of operations at Year 3)? What is its current value of operations (that is, at time zero)?
2. What is its value of equity on a price per share basis?
Purchase this Solution
Solution Summary
Solution describes the steps to find out value of operations, MVA and total corporate value
Solution Preview
Solution:
The first acquisition target is a privately held company in a mature industry. The company currently has free cash flow of $20 million. Its WACC is 10% and it is expected to grow at a constant rate of 5%. The company has marketable securities of $100 million. It is financed with $200 million of debt, $50 million of preferred stock, and $210 million of book equity.
1. What is its value of operations?
FCFo=$20 million
Value of operations=FCFo*(1+g)/(WACC-g)=20*(1+5%)/(10%-5%)=$420 million
2. What is its total corporate value? ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
- "Thank you"
- "Really great step by step solution"
- "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
- "Thanks Again! This is totally a great service!"
- "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Basics of corporate finance
These questions will test you on your knowledge of finance.
SWOT
This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
Transformational Leadership
This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.