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 $120 million and a YTM of 6 percent. The company’smarket capitalization is $340 million, and the required return onequity is 11 percent. Joe’s currently has debt outstanding with amarket value of $29.5 million. The EBIT for Joe’s next year isprojected to be $13 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 2.25 million sharesoutstanding and the tax rate for both companies is 38 percent.
a. What is the maximum share price that Happy Timesshould be willing to pay for Joe’s? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)
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 pricefor the purchase? (Do not round intermediate calculationsand round your answer to 2 decimal places, e.g., 32.16.)

Please show work for both parts (a & b)

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4.4 Ratings (870 Votes)

FCF 4600 wd 2609 we 7391 WACC 910 Free Cash Flow FCF EBIT x 1 tax Depreciation Capital Spending Net working capital EBIT x 1 38 8 15 9 46 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 $120 million and a YTM of 6 percent. The company’smarket capitalization is $340 million, and the required return onequity is 11 percent. Joe’s currently has debt outstanding with amarket value of $29.5 million. The EBIT for Joe’s next year isprojected to be $13 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 2.25 million sharesoutstanding and the tax rate for both companies is 38 percent.a. What is the maximum share price that Happy Timesshould be willing to pay for Joe’s? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)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 pricefor the purchase? (Do not round intermediate calculationsand round your answer to 2 decimal places, e.g., 32.16.)Please show work for both parts (a & b)