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 $200 million and a YTM of 6 percent. The company’smarket capitalization is $440 million, and the required return onequity is 11 percent. Joe’s currently has debt outstanding with amarket value of $33.5 million. The EBIT for Joe’s next year isprojected to be $13 million. EBIT is expected to grow at 8 percentper year for the next five years before slowing to 4 percent inperpetuity. Net working capital, capital spending, and depreciationas a percentage of EBIT are expected to be 7 percent, 13 percent,and 6 percent, respectively. Joe’s has 2.15 million sharesoutstanding and the tax rate for both companies is 30 percent.
a. What is the maximum share price that Happy Times should bewilling to pay for Joe’s? (Do not round intermediate calculationsand round your answer to 2 decimal places, e.g., 32.16.) Maximumshare price $
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.
b. What is your new estimate of the maximum share price for thepurchase? (Do not round intermediate calculations and round youranswer to 2 decimal places, e.g., 32.16.) Maximum share price$

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Lets calculate Weighted average cost of capital for Happy Times WACC EV Ke DV Kd1tax rate E Market value of equity D Market value of debt V E D Ke Cost of equity And Kd Cost of debt WACC 440011440200 200006103440200 88 A Calculation of EV using DCF FCFF See Answer

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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 $200 million and a YTM of 6 percent. The company’smarket capitalization is $440 million, and the required return onequity is 11 percent. Joe’s currently has debt outstanding with amarket value of $33.5 million. The EBIT for Joe’s next year isprojected to be $13 million. EBIT is expected to grow at 8 percentper year for the next five years before slowing to 4 percent inperpetuity. Net working capital, capital spending, and depreciationas a percentage of EBIT are expected to be 7 percent, 13 percent,and 6 percent, respectively. Joe’s has 2.15 million sharesoutstanding and the tax rate for both companies is 30 percent.a. What is the maximum share price that Happy Times should bewilling to pay for Joe’s? (Do not round intermediate calculationsand round your answer to 2 decimal places, e.g., 32.16.) Maximumshare price $ __________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.b. What is your new estimate of the maximum share price for thepurchase? (Do not round intermediate calculations and round youranswer to 2 decimal places, e.g., 32.16.) Maximum share price$__________