Assignment
For guidance on how to format your report, consider reviewing the following resources:
1. Annotated Sample Business Report: This includes recommendations and justifications, tables, and other elements.
2. Tables, Images, & Appendices): This includes guidance on how to create tables, which can be used to illustrate the calculations.
3. Considering Audience: This is a resource that guides writers addressing a specific audience.
In your project,
1. Explain the two valuation methods (DCF and comparative multiples) that would be used to value Favorite's stock if it was a private company, including the benefits and drawbacks of each method.
2. Calculate the pre-merger earnings per share for Admiral and Favorite and the pre-merger price-to-earnings (P/E) ratio for each company (based on the stated prices per share).
a. Use a table to illustrate your calculations and conclusion.
3. Calculate the exchange ratio of Admiral shares for each share of Favorite, based on the stated price per share of each company.
a. Use a table to illustrate your calculations and conclusion.
4. Calculate three additional exchange ratios of Admiral shares for each share of Favorite.
a. Assume a 15%, 20%, and 25% premium price per share over the stated Favorite price of $15 per share.
b. Use a table to illustrate your calculations and conclusion.
5. Calculate the Admiral Foods post-merger income statement and earnings per share, assuming an exchange ratio of 0.45.
a. Use a table to illustrate your calculations and conclusion.
6. Explain the other considerations (non-financial) the executive leadership team should consider prior to completing the merger.
7. Explain the merits of completing this merger as a stock exchange rather than a cash purchase, including the tax implications to Favorite shareholders and the impact on Admiral's capital structure.
a. Assume that Admiral's overall debt level would increase as a result of a cash purchase.
8. The VP of operations insists that the merger will generate $1.0 million in after tax earnings each year from synergies, due to Favorite using Admiral products in its cost of goods sold.
a. Calculate the free cash flow from the synergies for 5 years, assuming $100,000 of depreciation for each year.
b. Use a table to illustrate your calculations and conclusion.
c. Develop the terminal year value of the synergies based on the fifth year of the cash flows.
i. Assume the growth rate of the synergistic cash flows after the terminal year is 1.0%.
d. Calculate Admiral's required rate of return on equity using the CAPM.
i. Use Admiral's beta of 1.3, a risk-free rate of 2.0%, and a market risk premium of 7.0%.
ii. Use a table to illustrate your calculations and conclusion.
e. Calculate Admiral's weighted average cost of capital (WACC).
i. Assume Admiral's cost of debt is 4% (pretax).
ii. Use Admiral's market value of equity and book value of debt as its capital structure for the WACC calculation.
iii. Use a table to illustrate your calculations and conclusion.
f. Determine the net present value of the cash flows resulting from synergies.
i. Assume that the earnings due to synergies end after 5 years.
ii. Use a table to illustrate your calculations and conclusion.
g. Determine the EPS of the combined company in Year 1 if these synergies occur.
i. Assume an exchange ratio of 0.45.
ii. Use a table to illustrate your calculations and conclusion.
h. Compare this EPS (including synergies) to the EPS of the combined company without the synergies.
i. What percentage increase in EPS is this?
i. Explain the evidence on the average premiums paid in acquisitions.
i. Conduct research in the UAGC library to find supporting evidence on the size of premiums paid in transactions. (Hint: use this suggested search term: "average premium" AND "acquisitions"). Use Advanced Search Techniques to refine your search. The UAGC Library Tutorials webpage offers research essentials videos.
j. Propose your recommended price for Favorite shares and the exchange ratio for the merger based on this price.
i. Note that Mr. Favorite will not agree to the merger without some premium over the stated $15 price per share.