Could someone assist with this problem? Thank you. Debra Simpson, the CFO of Car
ID: 2446597 • Letter: C
Question
Could someone assist with this problem? Thank you.
Debra Simpson, the CFO of Carlson Airlines, was considering the acquisition of Beta Transport Supply Company. The asking price was $100 million. Carlson Airlines was in a 30 percent tax bracket. The purchase was to be for cash and Debra intended to use capital budgeting in the analysis.
Beta’s Past Performance
Last year, Beta had the following financial data.
Sales $30,000,000
Cost of Goods Sold 18,000,000
Gross Profit 12,000,000
Selling and Administrative Expenses 3,000,000
Depreciation Expense 4,000,000
Earnings before Taxes 5,000,000
Taxes (30%) 1,500,000
Plus Depreciation 4,000,000
Cash Flow $ 7,500,000
Debra’s Projections
Sales +11%
Cost of Goods Sold +8%
Selling and Administrative Expenses +20%
Depreciation +10%
She was doing a 10 year analysis and expected cash flow to grow by 12% each of the remaining 9 years. She used 10% as the discount rate.
She further projected she could sell Beta Transport for $140 million after 10 years and pay 15% tax on the proceeds.
Project cash flow for the 1st year after the merger.
Based on the 12 percent growth rate, project cash flow for the remaining 9 years. Round to the nearest dollar.
Discount back each of the 10 years of the cash flow at 10 percent. Round to the nearest dollar. Compute the total present value.
Discount back the aftertax sales price proceeds after 10 years. Round to the nearest dollar.
Add together the answers to questions 3 and 4. Then subtract the purchase price of $100 million for Beta Transport Supply Company. Should the company be purchased?
Explanation / Answer
Particulars Beta's Last year Performance Dabra's Projection for next year in % in figures Sales $30,000,000.00 + 11% $33,300,000.00 Cost of Goods Sold $18,000,000.00 + 8% $19,440,000.00 Gross Profit $12,000,000.00 $13,860,000.00 Selling and Administrative Expenses $3,000,000.00 + 20% $3,600,000.00 Depreciation Expense $4,000,000.00 + 10% $4,400,000.00 Earnings before Taxes $5,000,000.00 $5,860,000.00 Taxes (30%) $1,500,000.00 $1,758,000.00 Plus Depreciation $4,000,000.00 $4,400,000.00 Cash Flow $7,500,000.00 $8,502,000.00 Project cash flow for the 1st year after the merger. $8,502,000.00 Based on the 12 percent growth rate, project cash flow for the remaining 9 years. Round to the nearest dollar. Cash Flow Amount Present Value @ 10 % Discount Rate Year 1 $8,502,000 $7,729,091 Year 2 (12 % Growth) $9,522,240 $7,869,620 Year 3 (12 % Growth) $10,664,909 $8,012,704 Year 4 (12 % Growth) $11,944,698 $8,158,389 Year 5 (12 % Growth) $13,378,062 $8,306,724 Year 6 (12 % Growth) $14,983,429 $8,457,755 Year 7 (12 % Growth) $16,781,440 $8,611,532 Year 8 (12 % Growth) $18,795,213 $8,768,106 Year 9 (12 % Growth) $21,050,639 $8,927,526 Year 10 (12 % Growth) $23,576,716 $9,089,844 Discount back each of the 10 years of the cash flow at 10 percent. Round to the nearest dollar. Compute the total present value. Present Value $83,931,291 Discount back the aftertax sales price proceeds after 10 years. Round to the nearest dollar. Projected Sell price after 10 year $140,000,000 Purchase Price $100,000,000 Tax on transction (15% on profit) $6,000,000 Net Cash in flow $134,000,000 Present Value of Cash inflow $51,662,801 Add together the answers to questions 3 and 4. Then subtract the purchase price of $100 million for Beta Transport Supply Company. Should the company be purchased? Present Value of Cash Flows by operations $83,931,291 by selling $51,662,801 Total $135,594,092 Expected Net Cashflow is more than current purchase price, company should be pruchased.