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 $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 30 percent.
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 $

Answer & Explanation Solved by verified expert

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Part a Step 1 Calculate Weighted Average Cost of Capital The Weighted Average Cost of Capital can be calculated with the use of following formula WACC Weight of DebtAftertax Cost of DebtCost of Equity Using the values provided in the question we get Weight of Debt Market Value of DebtMarket Value of DebtMarket Value of Equity 160000000160000000400000000 Weight of Equity Market Value of EquityMarket Value of DebtMarket Value of Equity 400000000160000000400000000 Aftertax Cost of Debt YTM1Tax Rate 7130 490 Cost of Equity 12 Now we can get WACC as follows WACC 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 30 percent.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 $