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The importance of knowing the price per share to pay when acquiring target firms

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It's January 2013 and Han Solo Enterprises is considering an acquisition of Princess Leia Inc., a large private company headquartered in Orlando, Florida. As part of the process of evaluating the acquisition, your boss at Han Solo Enterprises, Lando Calrissian, has asked you to perform a valuation of Princess Leia Inc. and to assist in determining how much Han Solo Enterprises should offer. You have collected the following abbreviated financial statements data to help you with your analysis. All dollar amounts are in millions. Princess Leia's earnings and cash flows are expected to grow at the rate of 25% per year from 2012 to 2015, after which the growth rate is expected to stabilize at 5% per year indefinitely. The company's cost of capital is 15% and its combined marginal tax rate is 40%. Since Princess Leia Inc. is a private company, you understand that an illiquidity discount is necessary and have estimated that a discount of 20% is appropriate. What is the maximum price per share Han Solo Enterprises should be willing to pay for Princess Leia Inc. if the company has 1.25 billion shares outstanding? Assume that the long-term debt has a fair market value of $550 million and that "other assets" and "other long-term liabilities" are non-operating.

2012 2011
Income statement excerpts:
Net sales 24,509 19,166
Cost of sales 16,978 13,396
Gross profit 7,531 5,770
Operating expenses:
Distribution and marketing 2,232 2,140
Technology and content 740 533
General and administrative 328 279
Other operating expense (income), net 102 (24)
Total operating expenses 3,402 2,928
Income from operations 4,129 2,842
Balance sheet excerpts:
Current assets:
Cash and cash equivalents 3,444 2,769
Marketable securities 1,650 1,396
Inventories 2,171 1,399
Accounts receivable (net) and others 988 827
Deferred tax assets 272 204
Total current assets 8,525 6,595
Fixed assets, net 1,290 854
Deferred tax assets 18 145
Other assets 1,474 720
Total assets 11,307 8,314
Current liabilities:
Accounts payable 4,410 3,594
Accrued expenses and others 1,759 1,152
Total current liabilities 6,169 4,746
Long-term debt 520 409
Other long-term liabilities 849 487
Total stockholders' equity 3,769 2,672
Total liabilities and stockholders' equity 11,307 8,314.

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It's January 2013 and Han Solo Enterprises is considering an acquisition of Princess Leia Inc., a large private company headquartered in Orlando, Florida. As part of the process of evaluating the acquisition, your boss at Han Solo Enterprises, Lando Calrissian, has asked you to perform a valuation of Princess Leia Inc. and to assist in determining how much Han Solo Enterprises should offer. You have collected the following abbreviated financial statements data to help you with your analysis. All dollar amounts are in millions.
Princess Leia's earnings and cash flows are expected to grow at the rate of 25% per year from 2012 to 2015, after which the growth rate is expected to stabilize at 5% per year indefinitely. The company's cost of capital is 15% and its combined marginal tax rate is 40%. Since Princess Leia Inc. is a private company, you understand that an illiquidity ...

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The solution discusses the importance of knowing the price per share to pay when acquiring target firms.

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