Estimate of the maximum share price for the purchase

Assignment Help Finance Basics
Reference no: EM13265918

Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe's Party Supply. Happy Times currently has debt outstanding with a market value of $160 million and a YTM of 7 percent. The company's market capitalization is $400 million, and the required return on equity is 12 percent. Joe's currently has debt outstanding with a market value of $31.5 million. The EBIT for Joe's next year is projected to be $14.0 million. EBIT is expected to grow at 8 percent per year for the next five years before slowing to 4 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 7 percent, 13 percent, and 6 percent, respectively. Joe's has 1.95 million shares outstanding and the tax rate for both companies is 30 percent.

a. What is the maximum share price that Happy Times should be willing to pay for Joe's?

After examining your analysis, the CFO of Happy Times is uncomfortable using the perpetual growth rate in cash flows. Instead, she feels that the terminal value should be estimated using the EV / EBITDA multiple. The appropriate EV / EBITDA multiple is 10.

b. What is your new estimate of the maximum share price for the purchase?

 

Reference no: EM13265918

Questions Cloud

Obtain the thickness of the film : An extremely thin film of soapy water (n=1.36) sits on top of a flat glass plate with n=1.11. What is the thickness of the film
Determine what is the value of the friction losses : A DC motor has the following characteristics. Rating: 35kW Operation: 350 V, draws 90A, operates at a speed of 1100 rev/min when supplying full load. Shunt: Field resistance is 150 Ohm and armature resistance is 0.5 Ohm
What is the current price of the bond : Suppose a German company issues a bond with a par value of €1,000, 25 years to maturity, and a coupon rate of 6.4 percent paid annually.
Compute the average speed of hg vapor atoms : 1. Average speeds of gas particles (give answers in m/s) a. Calculate the average speed of Hg vapor atoms at 500oC b. Calculate the root-mean-square speed
Estimate of the maximum share price for the purchase : After examining your analysis, the CFO of Happy Times is uncomfortable using the perpetual growth rate in cash flows. Instead, she feels that the terminal value should be estimated using the EV / EBITDA multiple. The appropriate EV / EBITDA multip..
Find the ufos average acceleration during the turn : A pilot claims to have seen a UFO moving initially at a speed of about 374 m/s in an easterly direction and then, Compute the UFO's average acceleration during the turn
Find what is total real power and reactive power produced : A three phase generator is producing power for a balanced load. Each phase provides an rms voltage of 690 V and an rms current of 1000 A. The angle between the voltage and current in each phase is 20 degrees.
Promotion of racial discrimination : Racism is a menace to mankind. But despite of having the knowledge of such truth the American society is indulging in the promotion of racial discrimination through different ways and manners.
Calculate the balls instantaneous acceleration : A baseball has a velocity of 41.5 m/s (92.8 mi/h), directed horizontally, as it is released by a pitcher. Calculate the ball's instantaneous acceleration just before it is released

Reviews

Write a Review

Finance Basics Questions & Answers

  Raising fund for company

A company has raised $80 million from selling stocks. It wants to take part in a venture that requires $40 million this year, its annual after tax cash flow over the next seven years will be only $325,000.

  Objective type questions on leverages

Objective type questions on leverages and The major short coming of the EBIT-EPS approach to capital structure is that

  What is the companys after-tax return on the preferred

Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company. The before-tax dividend yield on the preferred stock is 12%. What is the company's after-tax return on the preferred, assuming a 70% dividend exc..

  Purchasing stock on leverage

You have $40,000 to invest on Sophie Shoes, a stock selling for $80 a share. The intial margin requirement is 60%. Ignoring taxes & commissions,

  Compute the required rate of return on fbc stock

Compute the required rate of return on FBC stock.

  Describe pricing decisions

Describe Pricing Decisions where a little reflection shows that this statement is off-target and provide an argument demonstrating why it is incorrect

  Describe common stock valuation with different growth rates

Describe Common stock valuation with different growth rates over a period

  Paid annually and a maturity of 15 years.

XYZ Company is considering a project has a useful life of 5 years and costs $1 million. The project will have cash flows of $350,000 per year for the life of the project. Also, suppose XYZ Company's stock has a beta of 1.25, the return on Treasury bi..

  What is the apr

A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR?

  Show the modigliani miller proposition

Suppose a world without taxes. Two companies, Mix Corporation and Dial Corporation are identical in every way except for their capital structures. Mix, an all-equity firm, has 200000 shares of common stock outstanding;

  Journalize nhs''s issuance of the bonds

NHS Co. issued $350,000 of 10-year bonds payable on January 1. NHS pays interest each January 1 and July 1 and amortizes any discount or premium by the straight-line method. NHS issued the bonds at a price of $430,000 when the market rate was belo..

  Which project is least risky

Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for pusrposes of this comparison.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd