The Gilded Hoop, Inc. has been solicited by an owner of five stores within the greater...

 

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The Gilded Hoop, Inc. has been solicited by an owner of five stores within the greater Los Angeles area who is contemplating the sale of his company and exploring the possibility of The Gilded Hoop as a potential buyer. Listed below are the five stores and the sales volume for their most recent fiscal year: GLENDALE GALLERIA WEST SIDE PAVILION MONTEBELLO TOWN CENTER FOX HILLS MALL SHERMAN OAKS $452,000 $350,000 $325,000 $311,000 $365,000 Given the sales volume (from above) that The Gilded Hoop anticipates generating a compound annual growth rate of 3% per year for the remaining six years of their respective leases. Each of the stores has six years left on their respective leases with no provision for renewing the leases at their intended expiry date. The Gilded Hoop feels that each store will initially require a $60,000 remodeling cost immediately upon purchase of the stores, as well as an immediate required inventory investment of $50,000 in each of the five locations, with an additional amount of required inventory in the following year of $10,000 for each the locations. The Gilded Hoop estimates that the Gross Profit will approximate 60% of Sales and Total Operating Expenses are estimated at 44% of Sales. Aggregate depreciation, for all of the stores, (the provision of which, is included in Operating Expenses), is estimated at $100,000 per year, once again included in the projected Operating Expenses. The combined Federal and State tax rate is 30%. The Gilded Hoop, Inc. explores each potential location it opens through a "Net Present Value" analysis. The acquisition, if undertaken, will be all equity financed. Thus, as to its Cost of Equity Capital, The Gilded Hoop utilizes an industry "Beta" of 1.32. Additionally, the prevailing 10 year U.S. Treasury Bond yield is 7.44%, and the "market risk premium" is estimated at 8%, as well as a "small-cap risk premium of 5%. The owner of the five stores is seeking $650,000 for all the assets and rights of all of his five stores under the respective leases. It is assumed that The Gilded Hoop could immediately sell off the present owner's inventory (which has an estimated retail value of $150,000, you may disregard any tax considerations in connection with the disposition value of the seller's inventory). The deal is essentially all five stores or nothing at all. With consideration to the above, if the numbers make sense, should The Gilded Hoop undertake the acquisition? If it does not appear to be a justified price, would you propose a strategically devised alternative settlement that you could support offering the present owner. The Gilded Hoop, Inc. has been solicited by an owner of five stores within the greater Los Angeles area who is contemplating the sale of his company and exploring the possibility of The Gilded Hoop as a potential buyer. Listed below are the five stores and the sales volume for their most recent fiscal year: GLENDALE GALLERIA WEST SIDE PAVILION MONTEBELLO TOWN CENTER FOX HILLS MALL SHERMAN OAKS $452,000 $350,000 $325,000 $311,000 $365,000 Given the sales volume (from above) that The Gilded Hoop anticipates generating a compound annual growth rate of 3% per year for the remaining six years of their respective leases. Each of the stores has six years left on their respective leases with no provision for renewing the leases at their intended expiry date. The Gilded Hoop feels that each store will initially require a $60,000 remodeling cost immediately upon purchase of the stores, as well as an immediate required inventory investment of $50,000 in each of the five locations, with an additional amount of required inventory in the following year of $10,000 for each the locations. The Gilded Hoop estimates that the Gross Profit will approximate 60% of Sales and Total Operating Expenses are estimated at 44% of Sales. Aggregate depreciation, for all of the stores, (the provision of which, is included in Operating Expenses), is estimated at $100,000 per year, once again included in the projected Operating Expenses. The combined Federal and State tax rate is 30%. The Gilded Hoop, Inc. explores each potential location it opens through a "Net Present Value" analysis. The acquisition, if undertaken, will be all equity financed. Thus, as to its Cost of Equity Capital, The Gilded Hoop utilizes an industry "Beta" of 1.32. Additionally, the prevailing 10 year U.S. Treasury Bond yield is 7.44%, and the "market risk premium" is estimated at 8%, as well as a "small-cap risk premium of 5%. The owner of the five stores is seeking $650,000 for all the assets and rights of all of his five stores under the respective leases. It is assumed that The Gilded Hoop could immediately sell off the present owner's inventory (which has an estimated retail value of $150,000, you may disregard any tax considerations in connection with the disposition value of the seller's inventory). The deal is essentially all five stores or nothing at all. With consideration to the above, if the numbers make sense, should The Gilded Hoop undertake the acquisition? If it does not appear to be a justified price, would you propose a strategically devised alternative settlement that you could support offering the present owner.

Answer rating: 100% (QA)

Current sales across all five stores 311000 1803000 202 203 Year 204 Sales 205 Gross Profit Expected ... View the full answer