Question

Company Merk: The company that will acquire company Pond. Merk would acquire Pond and value Pond using the data below.

Company Pond Financial Data: Pond Debt ratio 50%

Pond Tax rate 35%

Pond Beta 1.50

Risk free rate 8%

Market risk premium 4%

Pond shares outstanding 120,000

Pond Cost of Goods Sold 65% of sales

Pond Terminal growth rate 7% after year 2018

(Dollars in thousands)

2015 2016 2017 2018

Sales $450.0 $518.0 $555.0 $600.0

Cost of Goods Sold (65%) 292.5

Gross Profit 157.5

Selling/admin. costs 45.0 53 60 68

EBIT 112.5

Interest 18.0 21 24 27

EBT 94.5

Taxes (35%) 33.1

Net Income/Cash Flow $61.4

Answer the following questions:

What discount rate should be used to value Pond?

What is the terminal value of Pond?

Assume that the terminal growth rate is 7% What is the total value of Pond?

What should be the maximum price per share Merk should offer Pond?

Answer 1

	2015	2016	2017	2018
Sales	$450.00	$518.00	$555.00	$600.00
COGS	$292.50	$336.70	$360.75	$390.00
Selling & admin cost	$45.00	$53.00	$60.00	$68.00
EBIT	$112.50	$128.30	$134.25	$142.00
Interest	$18.00	$21.00	$24.00	$27.00
EBT	$94.50	$107.30	$110.25	$115.00
Taxes @ 35%	$33.08	$37.56	$38.59	$40.25
PAT	$61.43	$69.75	$71.66	$74.75
Beta	1.5
Rf	8%
Rm-Rf	4%
Re	14.00%
		%
The debt rate is not given, so we assume that Pond has 2% spread over risk free rate
And debt rate for Pond is 10% and post tax rate is 6.5%
Debt	6.50%	50%
Equity	14.00%	50%
WACC	10.2500%
Terminal value	PAT(2018)*(1+tg)/(WACC-tg)
TV	$2,461.00
Cash Flow	$61.43	$69.75	$71.66	$74.75
Add: TV				$2,461.00
Total	$61.43	$69.75	$71.66	$2,535.75
Enterprise value	$1,882.86
Less: debt	$180.00	At a rate of 10%, the current debt level is: 18/0.10
Equity value	$1,702.86
No. of shares	120	(in thousand)
Max value per share	$14.19