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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

TV = $1,296,947,000 answer ??????

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
_________________
Answer ??????? Total Value $752,162,633.50
_________________

Solution Preview

Your calculations are correct

The methodology used is called Free cash flow to equity, where we are left with the cash flows to the equity holders. In this we add ...

Solution Summary

The solution explains how to calculate the terminal value and then the total value for a target firm.

$2.19