e. The first acquisition target is a privately hel company in a mature industy o
ID: 2668523 • Letter: E
Question
e. The first acquisition target is a privately hel company in a mature industy owned by two brothers, each with 5 million shares of stock. The company currenlty has free cash flow of 20 million. Its WACC is 11%, and the free cash flow is expected to gorw at a constant rate of 5%. The company owns marketable securities of 100 million. It is financed with 200 million of debit, 50 million of preferred stock, and 210 million of book equity. 1. What is the value of operations? 2. What is its total corporate value? 3. What is its intrinsic value of equity? 4. What is its intrinsic stock price per share? 5. What is its intrinsic MVA (MVA = Total corporate value - Total book value of capital supplied by investors)?Explanation / Answer
1. Computing the value of operations: Vop = FCF0 (1+g) / (WACC - g) where FCF0 = $20,000,000 g = 5% WACC = 11% Substituting the values in the above formula, we get Vop = $20,000,000 (1+0.05) / (0.11- 0.05) = $21,000,000 / 0.06 = $350,000,000 Therefore, the Value of operations is $350million. 2. Computing the Total corporate value: Total corporate value = Value of operations + Marketable securities = $350,000,000 + $100,000,000 = $450,000,000 Therefore, the total corporate value is $450million 3. Computing the intrinsic value of equity: Intrinsic value of equity = Total value - Value of debt - Value of preferred = $450,000,000 - $200,000,000 - $50,000,000 = $200,000,000 Therefore, the intrinsic value of equity is $200,000,000 4. Computing the intrinsic stock per share: Intrinsic stock per share = Intrinsic value of equity / Number of shares of stock = $200,000,000 / 5,000,000 = $40 Therefore, the intrinsic stock per share value is $40 5. Computing the intrinsic MVA: Intrinsic MVA = Total corporate value of the firm - Total Book value of the firm But we have to calculate the total book value Total book value = Book value of equity + book value of debt + Book value of preferred stock = $210,000,000 + $200,000,000 + $50,000,000 = $460,000,000 Intrinsic MVA = $450,000,000 - $460,000,000 = ($10,000,000) Therefore, the value of intrinsic MVA is ($10,000,000)Related Questions
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