Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Question
Chapter 9, Problem 23P
a.
Summary Introduction
To determine: The annual
Introduction
Free cash flow: Free cash flow is the total value of the cash that is generated after the capital expenditure and operating expenses in a business firm.
b.
Summary Introduction
To determine: The EBIT margin.
Introduction:
Free cash flow: Free cash flow is the total value of cash that is generated after the capital expenditure and operating expenses in a business firm.
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Penn Corp. is analyzing the possible acquisition of Teller Company. Both believes the acquisition will increase its total aftertax annual cash flow by $1,176,015.93 indefinitely. The current market value of Teller is $23,453,722 and that of Penn is $63,348,212. The appropriate discount rate for the incremental cash flow is 13.63%. Penn is trying to decide whether it should offer 36% of its stock or $35,478,193 in cash to Teller's shareholders.
What is the equity cost of the acquisition?
HINT: Compute the value of the combined firm by adding the current value of the target with the present value of the differential cash flow of the combined firm. To determine the equity cost of the acquisition, add the current value of the acquirer and then multiply by the proposed percentage of the stock that has been offered for the firm.
Kenneth Cole Productions (KCP) was acquired in 2012 for a purchase price of $15.02 per share. KCP had 18.4 million shares outstanding, $46.8 million in cash, and no debt at the time of the
acquisition.
a. Given a weighted average cost of capital of 10.9%, and assuming no future growth, what level of annual free cash flow would justify this acquisition price?
b. If KCP's current annual sales are $475 million, assuming no net capital expenditures or increases in net working capital, and a tax rate of 40%, what EBIT margin does your answer in part (a)
require?
a. Given a weighted average cost of capital of 10.9%, and assuming no future growth, what level of annual free cash flow would justify this acquisition price?
The level of annual free cash flow that would justify this acquisition price is $
million. (Round to two decimal places.)
Penn Corp. is analyzing the possible acquisition of Teller Company. Both believes the acquisition will increase its total aftertax annual cash flow by $1,272,653.1 indefinitely. The current market value of Teller is $23,042,111 and that of Penn is $62,440,594. The appropriate discount rate for the incremental cash flow is 14.22%. Penn is trying to decide whether it should offer 33% of its stock or $36,097,009 in cash to Teller's shareholders.
What is the NPV of the stock offer?
HINT: Subtract the equity cost (as computed in the previous problem) from the value of the combined firm.
Chapter 9 Solutions
Corporate Finance
Ch. 9.1 - How do you calculate the total return of a stock?Ch. 9.1 - Prob. 2CCCh. 9.1 - Prob. 3CCCh. 9.2 - In what three ways can a firm increase its future...Ch. 9.2 - Under what circumstances can a firm increase its...Ch. 9.3 - How does the growth rate used in the total payout...Ch. 9.3 - Prob. 2CCCh. 9.3 - Prob. 3CCCh. 9.4 - Prob. 1CCCh. 9.4 - What implicit assumptions are made when valuing a...
Ch. 9.5 - State the efficient market hypothesis.Ch. 9.5 - Prob. 2CCCh. 9 - Assume Evco, Inc., has a current price of 50 and...Ch. 9 - Anle corporation has a current price of 20, is...Ch. 9 - Suppose Acap Corporation will pay a dividend of...Ch. 9 - Prob. 4PCh. 9 - NoGrowth Corporation currently pays a dividend of...Ch. 9 - Summit Systems will pay a dividend of 1.50 this...Ch. 9 - Prob. 7PCh. 9 - Prob. 8PCh. 9 - In 2006 and 2007, Kenneth Cole Productions (KCP)...Ch. 9 - Prob. 10PCh. 9 - Prob. 11PCh. 9 - Prob. 12PCh. 9 - Prob. 13PCh. 9 - Prob. 14PCh. 9 - Halliford Corporation expects to have earnings...Ch. 9 - Prob. 16PCh. 9 - Prob. 17PCh. 9 - Prob. 18PCh. 9 - Prob. 19PCh. 9 - Prob. 20PCh. 9 - Prob. 23PCh. 9 - Prob. 24PCh. 9 - Prob. 25PCh. 9 - Suppose that In January 2006, Kenneth Cole...Ch. 9 - Prob. 27PCh. 9 - Prob. 28PCh. 9 - Prob. 29PCh. 9 - Prob. 30PCh. 9 - Prob. 31PCh. 9 - Prob. 32P
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