Question
In: Finance
Company Merk: The company that will acquire company Pond. Merk would acquire Pond and value Pond...
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?
Solutions
Expert Solution
| 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 | |||||
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