Dallas Corp. and Paso Corp., a potential acquirer, have agreed on the following projections for Latch over the next 8 years (2020-2027):

- Sales in 2020 (first projected year) are expected to be $120.0 million, a 5% growth over the preceding year.

- 2021-2023: sales are expected to grow at a 6% annual rate. - 2024-2027: sales are expected to grow at a 3% annual rate.

- EBIT margins over the period will improve from 40% by increment of 0.5% every year until it reaches 43% and remains at this level.

- EBIT is projected to grow by 1.5% per year in perpetuity after 2027.

Capital expenditure requirements are assumed to be equal to depreciation. Net working capital requirements are forecast as 10% of sales.

Paso Corp. does not expect any synergy from the acquisition. The transaction is expected to close on December 31, 2019.

Latch has debt with a market and book value of $50 million (same estimated values as of 12/31/19). We assume that Latch has the same business risk as Paso Corp., also a manufacturer of latches, and the same proportion of debt as Paso Corp., which has a WACC of 11%.

Assume a 30% tax rate.

Find Latch's equity value at the closing date and build a sensitivity table for different assumptions in the terminal EBIT growth rate (from 0% to 3% by increments of 0.5%) and WACC from plus or minus 2% around its current value by increments of 1%...

a. ...assuming that all cash flows during a year occur at year-end

b. ...assuming that all cash flows are generated mid-year

Answer rating: 100% (QA)

a Assuming that all cash flows during a year occur at yearend Using the projections given we can calculate Latchs free cash flows to the firm FCFF for ... View the full answer