Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish...

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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 $230 million and a YTM of 8 percent. The company’smarket capitalization is $370 million and the required return onequity is 13 percent. Joe’s currently has debt outstanding with amarket value of $35 million. The EBIT for Joe’s next year isprojected to be $15 million. EBIT is expected to grow at 9 percentper year for the next five years before slowing to 2 percent inperpetuity. Net working capital, capital spending, and depreciationas a percentage of EBIT are expected to be 8 percent, 14 percent,and 7 percent, respectively. Joe’s has 2.3 million sharesoutstanding and the tax rate for both companies is 30 percent.
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 is7. What is your new estimate of the maximum share price for thepurchase?

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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 $230 million and a YTM of 8 percent. The company’smarket capitalization is $370 million and the required return onequity is 13 percent. Joe’s currently has debt outstanding with amarket value of $35 million. The EBIT for Joe’s next year isprojected to be $15 million. EBIT is expected to grow at 9 percentper year for the next five years before slowing to 2 percent inperpetuity. Net working capital, capital spending, and depreciationas a percentage of EBIT are expected to be 8 percent, 14 percent,and 7 percent, respectively. Joe’s has 2.3 million sharesoutstanding and the tax rate for both companies is 30 percent.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 is7. What is your new estimate of the maximum share price for thepurchase?