Happy Times, Inc., wants to expand its party stores into theSoutheast. In order to establish an immediate presence in the area,the company is considering the purchase of the privately held Joe’sParty Supply. Happy Times currently has debt outstanding with amarket value of $220 million and a YTM of 9 percent. The company’smarket capitalization is $300 million and the required return onequity is 14 percent. Joe’s currently has debt outstanding with amarket value of $27.5 million. The EBIT for Joe’s next year isprojected to be $16 million. EBIT is expected to grow at 10 percentper year for the next five years before slowing to 3 percent inperpetuity. Net working capital, capital spending, and depreciationas a percentage of EBIT are expected to be 9 percent, 15 percent,and 8 percent, respectively. Joe’s has 2 million shares outstandingand the tax rate for both companies is 38 percent.

a.

What is the maximum share price that Happy Times should bewilling to pay for Joe’s? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)

b.

After examining your analysis, the CFO of Happy Times isuncomfortable using the perpetual growth rate in cash flows.Instead, she feels that the terminal value should be estimatedusing the EV/EBITDA multiple. The appropriate EV/EBITDA multiple is8. What is your new estimate of the maximum share price for thepurchase? (Do not round intermediate calculations and roundyour answer to 2 decimal places, e.g., 32.16.)