Kenneth Cole Productions (KCP) was acquired in 2012 for a purchase price of $ 14
ID: 2784171 • Letter: K
Question
Kenneth Cole Productions (KCP) was acquired in 2012 for a purchase price of
$ 14.84 per share. KCP had 18.1 million shares outstanding, $ 43.6 million in cash and no debt at the time of the acquisition.a. Given a weighted average cost of capital of
10.9 % and assuming no future growth, what level of annual free cash flow would justify this acquisition price?b. If KCP's current annual sales are
$ 478 million, assuming no net capital expenditures or increases in net working capital, and a tax rate of
40% what EBIT margin does your answer in part(a)require.
a. Given a weighted average cost of capital of
10.9 % and assuming no future growth, what level of annual free cash flow would justify this acquisition price?The level of annual free cash flow that would justify this acquisition price is
$million.(Round to two decimal places.)
Explanation / Answer
Firm value = Equity + Debt - Cash
Equity = 14.84*18.1 = 268.604 million
Firm value = 268.604 - 43.6 = 225.004
Firm value = FCFF / WACC
1)
FCFF = Firm value * WACC
FCFF = 225.004 * 10.9%
= 24.53 million
b)
EBIT = FCFF / (1-tax rate)
= 24.53 / (1-40%)
= 40.88
EBIT margin = EBIT / Sales
= 40.88 / 478
= 8.55%
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