Solomon Entertainment (incorporated in US) is a listed company in the US established by Dr. Seymour...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Solomon Entertainment (incorporated in US) is a listed company in the US established by Dr. Seymour Kitsch years ago. The company specializes in the production of movies and TV shows where two business operates separately as the following: • Producing movies required large initial investments. Profitability of a movie is highly uncertain. Furthermore, Solomon sold all their movie rights after every movie's first run, in order to raise money for future movie developments. The company bear most of the development cost of the movie. Therefore, the profit of the movie division is volatile with some years in large profit and some other years in deep losses. Furthermore, the company does not own any rights in movies it produced. Sometimes, a buyer will purchase movie rights produced by Solomon Entertainment, where both the payment and the delivery of the movie rights will be in a specific date in the future bounded by a contract. The company is no longer producing TV shows, However, local TV stations have been paying the company for re-runs of old TV shows. The payments have been stable and growing and usually pre-paid with cash. The TV stations bear most of the cost, where it is expected to pay Solomon USD $300 million after cost, growing steadily at 2% per year. Historically. TV stations do not stop re-runs as audiences are happy with shows repeating on TV. Happy Cola, a major global producer of soft drinks is considering buying Solomon Entertainment. Happy Cola CEO recently commented "Happy Cola needs to diversify its revenue source to offset any potential downturn in our own soft drink industry." Happy Cola's CFO Doug Iniesta sets a straight rule: "Happy Cola will only invest in project that has IRR (Internal Rate of Return) above 16%, which is the WACC of Happy Cola." This year, the after-tax profit of Solomon is $200 million USD where there is a loss of $100 million USD from the movie division, and gain of $300 million USD in the TV division. Answer all the following questions based on the given information of the case: (a) Name and elaborate the acquisition/merger strategy by Happy Cola in (5 marks) acquiring Solomon Entertainment. (b) Adrian Au, an investment analyst commented "The buying and delivering (12 marks) of movie rights from Solomon in a future date is an example of a call option, since it is the right to buy, in a future date and at a specific price." Do you agree or disagree? Defend and elaborate your answer with definition of call option and forward contract. (c) Solomon Entertainment is willing to sell only the TV division to Happy (12 marks) Cola. An analyst Bryan Suen proposed "Happy Cola should still use 16% as discount rate to calculate the value of the TV division, since it is Happy Cola's cost of capital." Do you agree or disagree? Defend and elaborate your answer in the context of using cost of capital as discount rate. (d) Happy Cola is planning to issue debt to pay for the acquisition of Solomon (11 marks) Entertainment. Happy Cola is expecting interest rate will remain low or will hear lower. However, buyers of debt are only interested Happy Cola fixed rate debt. Develop and illustrate a strategy of using interest rate swap to transform a Happy Cola fixed rate debt into a floating rate debt. Solomon Entertainment (incorporated in US) is a listed company in the US established by Dr. Seymour Kitsch years ago. The company specializes in the production of movies and TV shows where two business operates separately as the following: • Producing movies required large initial investments. Profitability of a movie is highly uncertain. Furthermore, Solomon sold all their movie rights after every movie's first run, in order to raise money for future movie developments. The company bear most of the development cost of the movie. Therefore, the profit of the movie division is volatile with some years in large profit and some other years in deep losses. Furthermore, the company does not own any rights in movies it produced. Sometimes, a buyer will purchase movie rights produced by Solomon Entertainment, where both the payment and the delivery of the movie rights will be in a specific date in the future bounded by a contract. The company is no longer producing TV shows, However, local TV stations have been paying the company for re-runs of old TV shows. The payments have been stable and growing and usually pre-paid with cash. The TV stations bear most of the cost, where it is expected to pay Solomon USD $300 million after cost, growing steadily at 2% per year. Historically. TV stations do not stop re-runs as audiences are happy with shows repeating on TV. Happy Cola, a major global producer of soft drinks is considering buying Solomon Entertainment. Happy Cola CEO recently commented "Happy Cola needs to diversify its revenue source to offset any potential downturn in our own soft drink industry." Happy Cola's CFO Doug Iniesta sets a straight rule: "Happy Cola will only invest in project that has IRR (Internal Rate of Return) above 16%, which is the WACC of Happy Cola." This year, the after-tax profit of Solomon is $200 million USD where there is a loss of $100 million USD from the movie division, and gain of $300 million USD in the TV division. Answer all the following questions based on the given information of the case: (a) Name and elaborate the acquisition/merger strategy by Happy Cola in (5 marks) acquiring Solomon Entertainment. (b) Adrian Au, an investment analyst commented "The buying and delivering (12 marks) of movie rights from Solomon in a future date is an example of a call option, since it is the right to buy, in a future date and at a specific price." Do you agree or disagree? Defend and elaborate your answer with definition of call option and forward contract. (c) Solomon Entertainment is willing to sell only the TV division to Happy (12 marks) Cola. An analyst Bryan Suen proposed "Happy Cola should still use 16% as discount rate to calculate the value of the TV division, since it is Happy Cola's cost of capital." Do you agree or disagree? Defend and elaborate your answer in the context of using cost of capital as discount rate. (d) Happy Cola is planning to issue debt to pay for the acquisition of Solomon (11 marks) Entertainment. Happy Cola is expecting interest rate will remain low or will hear lower. However, buyers of debt are only interested Happy Cola fixed rate debt. Develop and illustrate a strategy of using interest rate swap to transform a Happy Cola fixed rate debt into a floating rate debt.
Expert Answer:
Answer rating: 100% (QA)
a AcquisitionMerger Strategy by Happy Cola in Acquiring Solomon Entertainment Happy Cola is considering acquiring Solomon Entertainment to diversify its revenue sources and mitigate potential downturn... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
A particle's velocity changes from v = +20 m/s to v2 = 10 m/s in 3.0 s. What is the average acceleration of the particle over this time interval?
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Graph the exponential equation. Then state the inverse function in logarithmic form and graph it. Then state the domain and range of each function. = ()* = to Domain: Range: Inverse: Domain: Range:...
-
Suppose that E is an event. Use probability notation to represent a. The probability that event E occurs. b. The probability that event E occurs is 0.436.
-
A crate is supported by three cables as shown. Determine the weight of the crate knowing that the tension in cable AC is 544 lb. 36 in. 40 in 32 in 27 in. 60 in
-
The document that identifies and explains all differences between the companys record of cash and the banks record of that cash is the a. bank reconciliation. b. bank collection. C. bank statement....
-
A horizontal plank of mass m and length L is pivoted at one end. The planks other end is supported by a spring of force constant k (Fig P15.61). The moment of inertia of the plank about the pivot is...
-
SWOT Analysis a. Identify the applicable SWOT elements (Strengths, Weaknesses, Opportunities, Threats) for marketing your product in the country, derived from what you investigated in the previous 3...
-
ACCT 110 Integrated Excel Assignment #2 - Instructor: Nicole Harris Part 1: Balance Sheet and Income Statement Instructions: Use the drop down list under the column "type of account" to categorize...
-
Enduro Health Inc. makes a variety of health aids and accessories, including a mosquito net. For the month of April, the budget (reflecting company standards) and the actual results for the...
-
What is the Federal Reserve Act? What did it establish?
-
In what sequence should a corporations assets be distributed on liquidation of the corporation?
-
What is meant by the indoor management rule?
-
What is the VAR approach?
-
What factors influence an investors choice between shares and bonds?
-
situation. A zombie infection in Yonkers Public Schools grows by 15% per hour. The initial group of zombies was a group of 4 freshmen. How many zombies are there after 6 hours.
-
Perform the operation by first converting the numerator and denominator to scientific notation. Write the answer in scientific notation. 7,200,00/0.000009
-
Michael Woodford became the first foreign-born chief executive of a Nikkei 2252 firm when he was appointed Olympus's CEO. Being selected as Olympus's CEO was the culmination of the British citizen's...
-
In 1956, the Republic of the Sudan obtained its independence from Great Britain. Although unified, Sudan was effectively two countries within one. Northern Sudan, home of the nation's capital,...
-
The rapidly expanding Chinese economy has captured the attention of investors worldwide over the past two decades. Companies such as Longtop sought to capitalize on the growing interest in the...
-
8P1 In Exercises 1722, evaluate the permutation.
-
45P5 In Exercises 1722, evaluate the permutation.
-
Let A and B be events with P (A) = 0.2 and P (B) = 0.9. Assume that A and B are independent. Find P (A and B).
Study smarter with the SolutionInn App