70.2K

Verified Solution

Link Copied!

Answer the following question: Do we do the deal?

You are to evaluate the acquisition of Company AMC from the perspective of a buyer. Prepare a 10-year pro forma income statement based on the past years performance of AMC (provided) and the projected performance of AMC under your control. The presentation of the pro forma should utilize a spreadsheet format, either electronically submitted or it can be done manually. An example of the final product format is attached. Please provide the information in landscape format. Attached is the most recent 12-month income statement for AMC.

• Purchase Price of AMC: 12 times net income
• Perform an asset allocation procedure to determine your cost basis for the assets. Assume that Hard Assets have an independent fair market appraisal as follows:

4-year assets: $250,000

6-year assets: $325,000

15-year assets: $535,000

• Goodwill will be amortized over 28 years.
• For this problem, there will be no cash, A/R or inventory.
• Assume depreciation calculation for year one is constant for the 10 years.
• Create a depreciation schedule for the assets provided above
• Assume all assets are depreciated on a straight line basis for this analysis using the year classification. For example, a 4 yr asset will be depreciated over 4 years using the straight line depreciation method.
• 80% of the purchase price will be borrowed at a rate of 10% per year
• Assume interest expense for the entire year is the interest rate times beginning loan balance.
• Principal pay-down on the loan will be 8 even payments.

(Note: this loan amortizes in a unique manner.)

• Your tax rate is 38%.
• Revenue growth will be as follows:
  • Base year (old owner to your ownership) +10%
  • Year two over year one +5%
  • Years three thru ten +4% per year (year over year, or compounded)
• Cost of Goods sold: 61.5% of revenues
• SG&A (Sales, General and Administrative Expenses)
  • Base year (old owner vs new owner) +50%
  • Year two and on same amount as old owner
• Capital Expenditures create the cash flow(s) in the year given below with the breakdown of asset classifications per event.
  • Year of Cash flow: Yr 3 at $120,000
    • Breakdown: $60K (3 yr); $30K (5 yr); $30k (7 yr)
  • Year of Cash flow: Yr 6 at $150,000
    • Breakdown: $60K (3 yr); $30K (5 yr); $60k (7 yr)
• Hurdle Rate for Investment: 18%
• Calculate IRR

Do you buy AMC?

Attached 12 month historical

Attached Answering Format: Please provide clear explanation

ABC Corp Past 12 months Net Sales 2,200,000 Cost of Goods Sold 1,386,000 63% Gross Profit 814,000 SG&A 165,000 Depreciation 195,000 Operating Profit 454,000 Interest Expense 45,000 Earnings before Tax 409,000 Taxes 45% 184,050 Net Income 224,950 AMC CO Year 1 2 3 4 5 6 7 8 9 10 Net Sales Cost of Goods Sold Gross Profit SG&A Depreciation + Amortization Operating Profit Interest Expense Earnings before Tax Taxes Net Income Net Income Add: Depreciation + Amortization Less: Loan Payment Less: Cap Expenditures Net After Tax Cash Flow Year 0 1 2 3 4 5 6 7 8 9 10 Investment (equity) Net Income Period Cash Flow NPV IRR ABC Corp Past 12 months Net Sales 2,200,000 Cost of Goods Sold 1,386,000 63% Gross Profit 814,000 SG&A 165,000 Depreciation 195,000 Operating Profit 454,000 Interest Expense 45,000 Earnings before Tax 409,000 Taxes 45% 184,050 Net Income 224,950 AMC CO Year 1 2 3 4 5 6 7 8 9 10 Net Sales Cost of Goods Sold Gross Profit SG&A Depreciation + Amortization Operating Profit Interest Expense Earnings before Tax Taxes Net Income Net Income Add: Depreciation + Amortization Less: Loan Payment Less: Cap Expenditures Net After Tax Cash Flow Year 0 1 2 3 4 5 6 7 8 9 10 Investment (equity) Net Income Period Cash Flow NPV IRR

Answer & Explanation Solved by verified expert

See Answer