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Topic:  Corporate Finance


 

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Type of paper: Coursework
Subject area: Finance
Academic level: College
Style: APA
Size: 30.5 kB
Word count:
437 words/2 pages
Mark awarded:  
Author: Clarisa Barrett
Date submitted: 2008-11-21 19:23:37
Rating/Votes count:
4.00 / 2
 
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Tags: personal, finance, interest, glen, present, corporate, blogging, critique, Degree, Corporate Finance, Earnings, Airbus, SCHOOL, Answer, International Finance, Auger Biotech, Biotech, Power Prepares, Power Plan, Sprague
Running Head : Corporate Finance
A sporting good manufacturer has decided to expand into a related
business . Management estimates that to build and estimates that to build
and staff a facility of the desired size and to attain capacity
operations would cost 275 million in present value terms .
Alternatively , the company could acquire an existing firm or division
with the desired capacity . One such opportunity is the division of
another company . The book value of the division 's asset is 140 million
and its earnings before interest and tax are presently 30 million .
Publicly traded comparable companies are selling a narrow range around
12 times current earnings . The companies have debt-to-asst ratios
averaging 40 percent with an average interest rate of 10 percent .
a . Using a tax rate of 34 percent , estimate the minimum price the owner
of the division should consider for its sale .b . What is the maximum
price the acquirer should be willing to pay ? c . Does it appear that that
an acquisition is feasible ? Why or why not ? d . Would a 25 percent
increase in stock prices to an industry average price to-to-earnings
ratio of 15 change your answer to (c ? Why or why not ?e . Referring to
the 275 million price tag on the replacement value of the division ,
what would you predict would happen to acquisition activity when market
values of companies and divisions rise above their replacement values ?
Name :
University :
Course :
Date :
The current value of the division acquisition is given by the number of divisions Assets (book values ) and the earnings after interest
and tax (Eliud , 1999 (EAIT )
Earnings after interest and tax are given by :
Earnings before interest and tax .
Less interest .
Less
tax .
Interest interest rate (r debt
Debt to asset ratio 40
Debt 40 14 ,000 ,000 .00
100 56 ,000 ,000 .00
Interest 10 56 ,000 ,000 .00 5 ,600 ,000 .00
Earnings after interest EBIT - Interest 30 ,000 ,000 .00 - 5 ,600 ,000 .00 24 ,400 ,000 .00
Tax tax rate EBT 34 24 ,400 ,000 .00 8 ,296 ,000 .00
Earnings after interest and tax
EAIT 24 ,400 ,000 .00 - 8 ,296 ,000 .00 16 ,104 ,000 .00
The minimum price the division owner should consider to sale 140 ,000 ,000 .00 16 ,104 ,000 .00 156 ,104 ,000 .00
N .B
EBIT Earnings before interest and tax (b ) The maximum price the acquirer should be willing to pay 140 ,000 ,000 .00 (16 ,104 ,000 .00 12 333 ,248 ,000 .00 (c ) Acquisition seems infeasible only when the division owner sells at
minimum .
This is because the cost of purchase would be more than cost of
building and staffing the facility (d ) A 25 increase in stock prices will not change the answer in (c .
This is because the change will lead to a maximum possible purchase
price of 284 ,936 ,000 .00 , which is also higher than the cost of
building , which is 275 ,000 ,000 .00 . i .e (16 ,104 ,000 12 75 284...
 

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