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# Acquisition Value

Magiclean Corporation is considering the acquisition of Dustvac Inc. Magiclean's analysts project the following postacquisition cash flows for Dustvac (in millions of dollars):

Year 1 Year 2 Year 3 Year 4
Net Sales \$200 \$181 \$195 \$226

Selling & Admin \$20 \$20 \$20 \$25
expenses

interest \$8 \$24 \$24 \$24

Cost of goods sold as a % of sales = 55%

Terminal growth rate of cash flow available to M's = 15%

If this acquisition is made, it will occur on January 1st, next year, all cash flows are assumed to occur at year end. Magiclean's tax rate is 38%; subsequent to the acquisition the firms will file a consolidated tax return. Dustvac's depreciation-generated funds will be used to replace obsolete equipment, so it will ot be available to Magiclean. The acquisition discount rate is 18%. Calculate Dustvac's Terminal Value at Year 4, the calculate the value of Dustvac to Magiclean.

____________________________________________________________________

My work is shown below: (please indicate if calculations are correct).....

Income Statement Year 1 Year 2 Year 3 Year 4
__________________ ______________ ______________ _________ __________

Net Sales (given) \$200,000,000 \$181,000,000 \$195,000,000 \$226,000,000
Cost of Goods Sold
(55% net sales) (\$110,000,000) (\$99,550,000) (\$107,250,000) (\$122,430,000)
_____________ ____________ ____________ ____________
Gross Profit
(45% net sales) \$90,000,000 \$81,450,000 \$87,750,000 \$103,570,000

Operating Exp.(given)(\$20,000,000) (\$20,000,000) (\$20,000,000) (\$20,000,000)
_____________ ____________ ___________ ____________
Operating Income \$70,000,000 \$61,450,000 \$67,750,000 \$78,570,000

Interest Expense(given) (\$8,000,000) (\$24,000,000) (\$24,000,000) (\$24,000,000)
_____________ ____________ ____________ ____________
Pre-tax income \$62,000,000 \$37,450,000 \$43,750,000 \$54,570,000

Income Tax Exp
(38% tax rate) (\$23,560,000) (\$14,231,000) (\$16,625,000) (\$20,736,600)
_____________ _____________ ____________ ___________
Net Income \$38,440,000 \$23,219,000 \$27,125,000 \$33,833,400

Retention ??????????? 0 0 0 0
____________ _____________ ____________ ___________
Cash Flow to M Corp. \$38,440,000 \$23,219,000 \$27125,000 \$33,833,400
___________________________________________________
___________________________________________________

A) Terminal Value -

TV = \$33,833,400 (1.15)
________________
0.18 - 0.15

= \$38,900,410
____________
.03

B) Calculate Value of D to M -

PV = \$38,440,000 (PVIF 18%, 1 period) or (1.18)^1 = \$32,576,271.19
\$23,219,000 (PVIF 18%, 2 period) or (1.18)^2 = \$16,675,524.27
\$27,125,000 (PVIF 18%, 3 period) or (1.18)^3 = \$16,509,112.42
\$33,833,400 (PVIF 18%, 4 period) or (1.18)^4 = \$17,450,891.33
\$1,296,947,000 (PVIF 18%, 4 period) or (1.18)^4 = \$668,950,834.30
_________________