A sporting goods manufacturer has decided to expand into a related business. Management estimates that to...

 

Transcribed Image Text:

A sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility of the desired size and to attain capacity operations would cost $1,060 million in present value terms. Alternatively, the company could acquire an existing firm or division with the desired capacity. One such opportunity is a division of another company. The book value of the division's assets is $1,000 million and its earnings before interest and tax are presently $125 million. Publicly traded comparable companies are selling in a narrow range around 12 times current earnings. These companies have book value debt-to-asset ratios averaging 40 percent with an average interest rate of 10 percent. a. Using a tax rate of 38 percent, estimate the minimum price the owner of the division should consider for its sale. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place. Minimum price million A sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility of the desired size and to attain capacity operations would cost $1,060 million in present value terms. Alternatively, the company could acquire an existing firm or division with the desired capacity. One such opportunity is a division of another company. The book value of the division's assets is $1,000 million and its earnings before interest and tax are presently $125 million. Publicly traded comparable companies are selling in a narrow range around 12 times current earnings. These companies have book value debt-to-asset ratios averaging 40 percent with an average interest rate of 10 percent. a. Using a tax rate of 38 percent, estimate the minimum price the owner of the division should consider for its sale. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place. Minimum price million

Answer rating: 100% (QA)

To estimate the minimum price the owner of the division should consider for its sale we can use the ... View the full answer