Avanguard Office Supplies is a nationwide retail chain that offers office supplies and office furniture. Company management
Question:
Avanguard Office Supplies is a nationwide retail chain that offers office supplies and office furniture. Company management has decided that, from both a competitive and a cost-cutting view, Avanguard should offer its own private-label brands for products like student notebooks, fillers, ledgers and journals. To accomplish this objective, Avanguard is considering the purchase of Alpha Paper, a manufacturer of paper products and notebooks. A five year income forecast for Alpha is given below. Cash flows are expected to grow permanently at a constant inflation rate after Year 5. Avanguard plans to keep Alpha's debt-equity ratio at its current level.
Year 1
Year 2
Year 3
Year 4
Year 5
Operating Cash Flow after tax
69
65.7
-2.7
33.9
67.9
Capital Expenditures
1.8
4.2
0.2
3.8
4.7
Other information:
Tax rate
35%
Book value of debt ($MM)
165
Book value of equity ($MM)
375.9
Share price ($)
10.3
Beta
0.81
Shares outstanding(MM)
52.3
Interest rate on company debt
4.95%
Current bond yields on similarly rated companies
5.15%
inflation
2.30%
Average Market Return 1926 - 2005
11.50%
Excess Cash on hand ($MM)
38
Average Market Risk Premium
8.20%
Calculate the equity value per share of Alpha using the discounted free cash flow method.
Avanguard announces a purchase price of $ per share. Do you think it is a fair price?
If you were advising Alpha; only considering price, should Alpha accept or reject this offer?
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr