2 1. You are a profitable conglomerate thinking about getting into the gelati business by acquiring the firm Alati Gelati (AG). Current info for you, AG and their similar comp is listed below. You estimate that, through your power in the marketplace, you could increase their sales 10% starting immediately. Margins will improve such that COGS will be 40% of all sales. Operating expenses will be $10 million each year not including depreciation. Their depreciation is an also $10 million but just for the next four years; starting in year 5, you will need to spend additional CAPX of $10 million. Before that, the only CAPX you will have to spend will be $80 million at the time of acquisition to achieve these benefits (this will be depreciated over the next four years). Net Working capital is always 5% of sales. This acquisition will also impact your firm. There will be some cannibalization (15% of your sales) since your firm sells some ice cream products; however, without this deal there were some expansion plans that AG would have done that would have decreased your sales 5% anyway. Assume the only costs associated with these sales were COGS. On a positive note, you can integrate these businesses to accomplish the following synergy: you can move some employees at minimal cost to one of AG's locations and sell the property that you own to house these employees. You bought this land a few years ago at $100 million but can now sell it for $250 million. After the five year horizon, you believe all bottom line free cash flows will grow at 4% annually. One manager in the room reminds you that the firm will allocate an overhead charge based on their overhead allocation policy of 1% of sales. Your figures are flat for the five year horizon and then free cash flows are expected to grow at the rate previously mentioned above. Note: The corporate tax rate is 30%. Assume that all cash flows are year-end except for the up-front investment. You will finance the project appropriately with 23% AAA debt. Assume beta of debt = 0 and a market risk premium of 6. You also have the following financial data pertaining to the market and to your publicly- traded competitors: Treasury Security Rate 3-month T-bill 2% 5-Year T-bond 3% 30-year T-bond 4% AAA debt 5% Your Firm Alati Gelati Gelateria Dondoli Stock Price $50 650 $30 Total Book Capitalization $800 Million $600 Million $600 Million Leverage Ratio (Book) 20% 20% 15% Shares Outstanding 22 Million 20 Million 30 Million Cast $12 Million $20 Million $10 Million Beta (from YahooFinance) 1.0 0.9 ).96 Total Sales $250 Million $200 Million $200 Million Gelati Sales 50 Million $200 Million $180 Million What is the breakeven bid per share for you to acquire AG (use DCF)? [39 points]