Hope Case Essay

1146 Words Jun 11th, 2011 5 Pages
Problem statement:
CHN Incorporated is evaluating the purchase of Hope Enterprises. The company could enhance its position in the mid-market gaming casino hotel business with the acquisition of Hope Enterprises. Hope Enterprises is considered a prime acquisition because of its strategic location, customer segment, booming market .The overall gaming casino business is predicted to boom in the coming year, with revenues increasing by 15%. However, CHN has to evaluate the synergies with Hope enterprises and decide on whether to make the acquisition. The management believed that the acquisition of Hope Enterprises by CHN could improve CHN’s margins through economies of scale, reduce cost and promote a sales growth accelerated to 12% over the
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We will use WACC model to evaluate Hope. 3. Assuming a discounted-cash-flow valuation, a. What rate of return should CHN require on the acquisition? In order to evaluate the rate of return we took WACC for Hope. We took the data from the Hope financial statement for the year 1995. To determine Re we used Gordon’s model: ke=D/P +g. E | 32,726 | 32,726 | D | 693,499 | 693,499 | tc | =44313/116614 | 38.0% | Re | =1.1/15+12% | 19.3% | Rd | =54405/693499 | 7.8% | WACC | =E/(D+E)*Re+D/(D+E)*Rd*(1-tc) | 5.5% | b. What base-case cash flows do you forecast?
The base cash flows are calculated using the formula: FCF = EBIT (1-t) + Depreciation –CX –NWC EBIT | 171,019 | depreciation | 75,449 | changes in capital expenditures | 62,000 | changes in working capital | 4,000 | FCF | 180,468 kUSD | c. What is your estimate of terminal value? In order to estimate the terminal value of Hope we used the formula TV=FCF/WACC= 180,468/0.055 =3,271,743 kUSD – enterprise value of Hope d.

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