In early 2018, Vacation Experts Inc. was interested in acquiring Beach Homes, In
ID: 2519299 • Letter: I
Question
In early 2018, Vacation Experts Inc. was interested in acquiring Beach Homes, Inc., a privately-held, real estate company. Beach Homes has 85 million shares currently outstanding. As a first step in deciding what price to bid for Beach Homes, Vacation Experts’ finance department has prepared a two-year financial projection for the company assuming an acquisition. Use this projection and Beach Homes' 2017 actual financial figures to answer the questions below.
Beach Homes Inc.
2-year Financial Projection
($ millions)
2017
2018
2019
Income statement
Net sales
320
395
410
Cost of sales
120
130
145
Gross income
200
265
265
Depreciation
50
55
58
Interest expense
15
17
22
Operating expenses
25
24
28
Net income before tax
110
169
157
Provision for taxes
33
51
47
Net income after tax
77
118
110
Balance sheet
Cash and securities
45
60
62
Accounts receivable
25
51
42
Inventory
47
74
50
Other current assets
18
15
17
Total current assets
135
200
171
Gross property and equipment
511
612
692
Accumulated depreciation
102
157
215
Net property and equipment
613
769
907
Goodwill
112
112
112
Total assets
860
1081
1190
Accounts payable
50
93
89
Short-term debt
62
75
79
Current portion long-term debt
12
20
22
Accrued expenses
18
20
21
Total current liabilities
142
208
211
Long-term debt
358
400
390
Deferred taxes
60
55
61
Shareholders' equity
300
418
528
Total liabilities and equity
860
1081
1190
7a. Estimate the present value of Beach Homes Inc.’s free cash flow for the years 2018 - 2019. Vacation Expert's WACC is 8 percent. Beach Homes' WACC is 10.5 percent, and the average of the two companies' WACCs, weighted by sales, is 9 percent. Please show work
EBIT
Tax rate
EBIT(1-tax rate)
Depreciation
Capital expenditures
Working capital
Change in working capital
Free cash flow
Beach Homes Inc.
2-year Financial Projection
($ millions)
2017
2018
2019
Income statement
Net sales
320
395
410
Cost of sales
120
130
145
Gross income
200
265
265
Depreciation
50
55
58
Interest expense
15
17
22
Operating expenses
25
24
28
Net income before tax
110
169
157
Provision for taxes
33
51
47
Net income after tax
77
118
110
Balance sheet
Cash and securities
45
60
62
Accounts receivable
25
51
42
Inventory
47
74
50
Other current assets
18
15
17
Total current assets
135
200
171
Gross property and equipment
511
612
692
Accumulated depreciation
102
157
215
Net property and equipment
613
769
907
Goodwill
112
112
112
Total assets
860
1081
1190
Accounts payable
50
93
89
Short-term debt
62
75
79
Current portion long-term debt
12
20
22
Accrued expenses
18
20
21
Total current liabilities
142
208
211
Long-term debt
358
400
390
Deferred taxes
60
55
61
Shareholders' equity
300
418
528
Total liabilities and equity
860
1081
1190
Explanation / Answer
WORKING NOTE:
2017(Y-0) 2018(Y-1) 2019(Y-2) INCOME BEFORE TAX 110 169 157 ADD:INTEREST 15 17 22 EBIT 125 186 179 LESS:TAX 33 51 47 ADD:DEPRICIATION 50 55 58 EBIT(1-TAX RATE)+DEPRCIATION(A) 142 190 190 LESS:CAPITAL EXPENDITURES(B) - 101(612-511) 80(692-612) WORKING CAPITAL (WORKING NOTE) (7) (8) (40) LESS:CHANGES IN WORKING CAPITAL(C) - (1) (32) FREE CASH FLOW(A-B-C) 90 142 WACC @ 10.5% P.V FACTOR .905 .819 PRESENT VALUE 81.45 116.30