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On October 20, 2020, Kevin Mason, President of Tropicane Juice is reviewing the financial statements of...

On October 20, 2020, Kevin Mason, President of Tropicane Juice is reviewing the financial statements of Sunnydee, a potential acquisition candidate for the company. Tropicane is an American company, which produces and distributes juice throughout North America. It is in juice production and is interested in getting into the Canadian market. Sunnydee is a Canadian company that produces similar juice products and sells these across Canada. Tropicane is a public company and Sunnydee is a private company. Sunnydee is owned by the local area farmers and was originally started as a co-operative. Of the 1,000,000 shares outstanding, 600,000 are owned by the founder of the company, Mr. S. The rest are owned by various employees. Sunnydee has a perpetual debt with a par value of $5 million and coupon rate of 6 percent. However, interest rates have decreased and now the debt has a 4 percent yield-to-maturity. Annual before-tax before-interest operating cash flows for the year just ended were $3 million. The corporate tax rate was 20 percent. Assume perpetual operating cashflows for Sunnydee’s future cashflows. Tropicane has return on equity of 12.24%, debt-to-equity ratio of 40%, and yield to maturity of 3% on its outstanding debt.

a) What do you think is the maximum acquisition price that Mr. Mason is willing to pay for acquiring Sunnydee?

b) Compute weighted average cost of capital for Sunnydee.

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Expert Solution

jeff jeffy answered 2 years ago
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