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

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Finance

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 $160 million and a YTM of 7 percent. The company’smarket capitalization is $400 million, and the required return onequity is 12 percent. Joe’s currently has debt outstanding with amarket value of $31.5 million. The EBIT for Joe’s next year isprojected to be $14 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 1.95 million sharesoutstanding and the tax rate for both companies is 30percent.

a. What is the maximum share price that HappyTimes should be willing to pay for Joe’s? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

Maximum share 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 is10.

b. What is your new estimate of the maximum shareprice for the purchase? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)

Maximum share price $

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3.5 Ratings (566 Votes)

WACC calculation Market value MV Cost k Weight W MvdebtTotal MV MvequityTotal MV Weighted cost Wk Debt 160 490 0286 140 Equity 400 1200 0714 857 Total 560 WACC 997 Share price calculation using DDM Formula Year n 0 1 2 3 4 5 Perpetuity Growth rate g 8 8 8 8 8 4 EBIT 12880000 14000000 15120000 16329600 17635968 19046845 19808719 30EBIT Tax 30 4200000 4536000 4898880 5290790 5714054 5942616 EBIT Tax Net income NI 9800000 10584000 11430720 12345178 13332792 13866103 6EBIT Add depreciation D 840000 907200 979776 1058158 1142811 1188523 NI D Operating Cash Flow OCF 10640000 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 $160 million and a YTM of 7 percent. The company’smarket capitalization is $400 million, and the required return onequity is 12 percent. Joe’s currently has debt outstanding with amarket value of $31.5 million. The EBIT for Joe’s next year isprojected to be $14 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 1.95 million sharesoutstanding and the tax rate for both companies is 30percent.a. What is the maximum share price that HappyTimes should be willing to pay for Joe’s? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)Maximum share 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 is10.b. What is your new estimate of the maximum shareprice for the purchase? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)Maximum share price $