Reading 33: Mergers and Acquisitions-LOS j 习题精选 center, company, discounted, 2011, class

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Session 9: Corporate Finance: Financing and Control Issues
Reading 33: Mergers and Acquisitions

LOS j: Calculate free cash flows for a target company and estimate the company’s intrinsic value based on discounted cash flow analysis.

 

 

Gambit Enterprises is being evaluated as an acquisition target. For the upcoming year an analyst has estimated the following values: net income = $300m, net interest after tax = $100m, change in deferred taxes = +$25m, depreciation = $200m, change in net working capital = +$30m, CAPEX = $250m. Calculate the firm’s estimated free cash flow.

A) $295m.

B) $405m.

C) $345m.

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Net income + net interest after tax = 300m + 100m = $400m = unlevered net income.
Unlevered net income + change in deferred taxes = 400m + 25m = $425m = NOPLAT.
NOPLAT + depreciation – change in net working capital – CAPEX = 425m + 200m – 30m – 250m = $345m = FCF.

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Gambit Enterprises is being evaluated as an acquisition target. An analyst believes that the firm will have free cash flow (FCF) of $500m during year 5, after which the growth rate in FCF is expected to be 4% indefinitely. The weighted average cost of capital (WACC) for Gambit is 10%. What is the estimated value of the firm at the end of year 5?

A) $8667m.

B) $8333m.

C) $9167m.

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Value at end of year 5 = (FCF year 5 × (1 + g)) / (WACC – g)
Value at end of year 5 = (500 × 1.04) / (0.10 – 0.04) = $8667m

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Gambit Enterprises is being evaluated as an acquisition target. An analyst estimates the firm’s free cash flows as $10m, $20m, $30m, $40m, and $50m over the upcoming 5 years. At the end of year 5, you estimate that the firm’s value will be $1000m. If the weighted average cost of capital (WACC) is 8%, what is your estimated value of the firm today?

A) $683m.

B) $794m.

C) $881m.

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Value =

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Felix Hernandez is evaluating a prospective merger between two firms of relatively equal size. The acquirer is planning to borrow the entire purchase price and pay for the merger in cash. Which method of estimating the target’s intrinsic value and potential merger synergies is likely to be most useful?

A) Comparable company analysis because the values are market-based.

B) Comparable company analyses because the assumption that similar assets should have similar values is fundamentally sound.

C) Discounted cash flow analysis because it will allow him to incorporate changes in the capital structure and cost of capital that are likely to result from the way the acquirer intends to raise the funds to pay for the target.

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Because the firms are of relatively equal size, and because the acquirer is planning to borrow the entire purchase price, it appears probable that the outcome will be a large change in capital structure. Comparable company analysis assumes that the capital structure remains fairly constant. Discounted cash flow analysis allows the analyst to incorporate changes in cash flows and the combined firm’s WACC that are likely to result from the change in capital structure.