QUESTION 1 1. Deming Tiles (DT) is being considered for acquisition by Jenks Hardware (JH). The stock price of DT is currently at $35 per share; current EPS is $2.75. The average P/E ratio in DTs industry is 25 while that of JH is 15. Using the P/E multiple approach, how much is DT worth to JH? What is your estimate of the stock price? $43.75 $25.25 $68.75 None of the above QUESTION 2 Suppose the EBIDTA multiple for a sample of firms in a certain industry is 3.5. If the EBITDA of a target firm in this industry is $5 million, what is your estimate of the targets stock price if the target has 2 million shares outstanding and $7 million in debt? $45.02 $17.50 $5.25 None of the above QUESTION 3 Which of the following statements is correct about the corporate valuation model in a merger analysis? The value of the target firms operations is estimated as the present value of the firms projected FCFs, discounted at the WACC. The value of the target firm is equal to NOPAT, discount at the WACC plus non-operating assets. The value of the target firms operations is estimated as the present value of FCFs and interest tax savings, discounted at the unlevered cost of equity. Answers a and c are correct. QUESTION 4 Which of the following statements about valuing a firm using the APV model is correct? The unlevered horizon value is calculated by discounting the horizon future FCF and tax savings at the levered cost of equity. Often, the discounting is based on some growth assumption. The unlevered horizon value is calculated by discounting the horizon future FCF at the levered cost of equity. Often, the discounting is based on some growth assumption. The unlevered horizon value is calculated by discounting the horizons future FCF at the cost of unlevered equity. Often, the discounting is based on some growth assumption. None of the statements above is correct. QUESTION 5 Which of the following statements about valuing a firm using the APV model is correct? The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity. The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the unlevered cost of equity. The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity. None of the statements above is correct. QUESTION 6 American Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware. Americans analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Eastern is 16 percent. Eastern has 4 million shares outstanding and no debt. Easterns current price is $16.25. What is the maximum price per share that American Hardware should offer? $16.25 $16.97 $18.13 None of the above QUESTION 9 [REPEAT INFO] Kazeem Metals Company has a debt ratio of 30%. Interest rate on its debt is 9%. Its unlevered beta is 1.3 and tax rate is 40%. Suppose that the riskfree interest rate is 5% and the required rate of return on the market is 12%. Calculate Kazeems cost of unlevered equity (i.e. rEU). Hint: Use the CAPM with unlevered beta. 16.34% 15.89% 14.10% None of the above QUESTION 10 For this and the next 2 questions: The Woodridge Hotels intends to acquire Wellington Resorts using new debt financing. The Woodridge estimates interest payments of $2 million dollars per year for 3 years after the acquisition. Expected free cash flows over the same period are $5 million, $6.5 million, and $8 million, respectively. Growth rate after this period is estimated to be 4%. Tax rate is 40%. Wellingtons current WACC is 12% and unlevered cost of equity (rEU) is 15%. Wellingtons capital structure will be different from its pre-merger capital structure if acquired by The Woodridge. Calculate the unlevered horizon value (UHV) of the free cash flows. $75.6364 million $61.4545 million None of the above QUESTION 12 In a merger valuation such as this, The corporate valuation method is still appropriate The constant growth valuation model should be used to calcualte the target firms value of operations today The adjusted present value (APV) method should be used QUESTION 13 In a M&A, the horizon value of the target firm could be calculated based on the targets current WACC if: The acquiring firm intends to maintain the target firms current capital structure after the initial post-merger period The acquiring firms capital structure will also apply to the target firm, if acquired None of the above QUESTION 15 Suppose in a M&A, a target firms current market value is $50 million. But you estimate its value as part of the acquiring firm to be $60 million. The target firm has 5 million shares outstanding. What is the most the acquirer should bid in order to preserve all of the synergistic benefits for its (acquirers) stockholders? $12 per share $10 per share $2 per share None of the above QUESTION 18 Which of the following is a function of the investment banker in a M&A process? [I] identifying potential target firms [II] arranging mergers [III] developing defensive tactics [IV] establishing a fair value of the target firm [V] arranging financing of the merger. I, II, III II, III, IV All of the above QUESTION 19 For this and the next 7 questions. Keri Automotive Corporation (KAC) is a national auto parts chain. It is considering the acquisition of a smaller chain called Southern Auto Company. KACs analysts estimate that the merger will result in the following cash flows (in millions): Year 1 2 3 4 FCF $2 $5 $5 $7 Interest expenses $1 $2 $2 $3 Unlevered horizon value (UHV4) $107 Horizon value interest tax savings (HVITS4) $20 Southern Auto Company (SAC) is currently financed with 30% debt at an interest rate of 10%. Current debt level is $15 million. SACs pre-merger beta (BL) is 2, and its post-merger tax rate would be 40%. Assume the risk-free interest rate is 8%, and market risk premium (i.e. market return minus riskfree interest rate) is 4%. Using the CAPM, calculate SACs cost of levered equity (use BL); i.e. calculate rEL. 16% 8% None of the above QUESTION 20 Calculate SACs cost of unlevered equity (that is rEU). 14.2% 14.5% None of the above Question 22 Calculate value of unlevered firm for SAC. For this problem, use cost of unlevered equity (rEU) of 14%. Do NOT use the cost of unlevered equity you calculated earlier. $76.473733 million $13.121143 million $14.05853 million $90.532263 million None of the above QUESTION 24 Using the APV method, calculate SACs Value of operations (VOP). $76.473733 million $86.156214 million $14.05853 million $90.532263 million None of the above QUESTION 25 What is the value of the target companys (SAC) equity. Recall that debt level is $15 million. About $62.48 million About $76.96 million About $78.86 million None of the above QUESTION 27 [ADDED FALL 2013] FOR THIS AND THE NEXT 4 QUESTIONS. CASH FLOW ESTIMATION & CORPORATE VALUATION IN A MERGER. PERFORM YOUR ANALYSIS ON SPREADSHEET AND THEN CHOOSE FROM MULTIPLE-CHOICE ANSWERS BELOW. Goi Sugar & Confectionary Industries, Inc. wishes to make a tender offer for Aon Corporation in a conglomerate merger. The target firms cost of capital will be used in the merger analysis. The financials for the two firms are summarized below. You wish to calculate the intrinsic value of Aon Corporation, the target firm. Bidder Target Goi Aon YTM: rD 10.00% 18.00% Tax Rate: T 40% 40% After-tax cost of debt: rD(1-T) 6.00% 10.80% Beta 1.20 2.00 Market Risk premium 5% 5% Riskfree interest rate: rF 7.00% 7.00% Cost of equity: rE 13.00% Debt ratio: wD 30% 30% Input for Target Firms Valuation Last years revenue (i.e. revenue at time 0) $9,434 Revenue Growth 8.00% Future constant growth rate 5.00% COGS as % of revenues 60% Operating expenses as % of revenues 15% Depreciation (straightline) $1,000 Net Working Capital (NWC) as % of sales 12% Capital expenditure per year $2,000 QUESTION 28 Calculate the target firms weighted average cost of capital. Caution! Correct calculation of WACC is required to correctly perform the valuation analysis below. 15.14% 17.0% 10.80% None of the above QUESTION 29 Calculate the target firms FCF in Year 5, before accounting for the horizon value. -$162 $356 $1,992 $4,043 None of the above QUESTION 30 Calculate the target firms TOTAL cash flow in Year 5, i.e. after accounting for the horizon value. -$162 $356 $1,992 $4,043 None of the above QUESTION 31 Calculate the intrinsic value of the target firms value of operations today. -$162 $1,992 $356 $4.043 None of the above