Bob, CEO of Shoes Inc., has identified Laces Ltd. as a possible acquisition cand
ID: 2719905 • Letter: B
Question
Bob, CEO of Shoes Inc., has identified Laces Ltd. as a possible acquisition candidate and a good strategic fit for the organization. Laces Ltd. has $100 million in assets and $20 million in par-value debt on the books. It currently trades for $35 per share on the open market and has 3 million common shares outstanding.
The current fiscal year closed yesterday with Laces Ltd. earning $10.50 M before interest and taxes (EBIT). After allowing for changes in NWC, taxes, depreciation, and capital expenditures, Laces Ltd. had $6.01 M in debt-free cash flows (cash flow from assets). Analysts expect their CFA to grow at 20% for the next two fiscal years and then settle down to a 5% annual growth rate thereafter. Laces Ltd.’s investors demand a return of 15% for similar risk assets.
Using the WACC-DCF approach, how much should Shoes Inc. should be willing to pay per share to acquire Laces Ltd?
Explanation / Answer
Value of Firm = FCFF1/(1+r) + FCFF2 /(1+r)^2 + (FCFF3/(Wacc-g))/(1+r)^2
Value of Firm = 6010000*1.2/1.15 + 6010000*1.2^2/1.15^2 + (6010000*1.2^2*1.05/(15%-5%))/1.15^2
Value of Firm = $ 81,526,956.52
Value of Equity = Value of Firm - Debt
Value of Equity = 81,526,956.52 - 20,000,000
Value of Equity = $ 61,526,956.52
Shoes Inc. should be willing to pay per share to acquire Laces Ltd = Value of Equity/common shares outstanding
Shoes Inc. should be willing to pay per share to acquire Laces Ltd = 61,526,956.52/3000000
Shoes Inc. should be willing to pay per share to acquire Laces Ltd = $ 20.51