• Calculate the pre-merger earnings per share for Admiral and Favorite and the pre-merger price-to-earnings (P/E) ratio for each company (based on the stated prices per share).
• Calculate the exchange ratio of Admiral shares for each share of Favorite, based on the stated price per share of each company.
• Calculate three additional exchange ratios of Admiral shares for each share of Favorite.
  • Assume a 15%, 20%, and 25% premium price per share over the stated Favorite price of $15 per share.
• Calculate the Admiral Foods post-merger income statement and earnings per share, assuming an exchange ratio of 0.45.
• The VP of operations insists that the merger will generate $1.0 million in after tax earnings each year from synergies, due to Favorite using Admiral products in its cost of goods sold.
  • Calculate the free cash flow from the synergies for 5 years, assuming $100,000 of depreciation for each year.
  • Calculate Admiral's required rate of return on equity using the CAPM.
    • Use Admiral's beta of 1.3, a risk-free rate of 2.0%, and a market risk premium of 7.0%.
  • Calculate Admiral's weighted average cost of capital (WACC).
    • Assume Admiral's cost of debt is 4% (pretax).
  • Develop the terminal year value of the synergies based on the fifth year of the cash flows.
    • Assume the growth rate of the synergistic cash flows after the terminal year is 1.0%.
  • Determine the net present value of the cash flows resulting from synergies.
    • Assume that the earnings due to synergies end after 5 years.
  • Determine the EPS of the combined company in Year 1 if these synergies occur.
    • Use the Admiral Foods post-merger income statement you calculated for this final project and the shares outstanding you calculated using an exchange ratio of 0.45.
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| Mergers and Acquisitions Admiral Foods Corporation is a diversified food processing and distributing company that has shown excellent growth over the past 10 years as a result of a balanced program of acquisitions and internal growth. One segment of the food business in which Admiral has only recently begun to com- pete, however, is the fast-food business. The present top management of Admiral Foods feels that good future growth in the fast-food business is still possible, regardless of the rapid expansion of the last two decades. During the past year, members of the Admiral staff have examined and analyzed a number of independent fast-food firms. One com- pany that the analysis indicated as potentially suitable for acquisition by Admiral is Favorite Food Systems Inc. Favorite Food Systems Inc. which was founded by John Favorite in 1994, is a West Coast chain with current annual sales of approximately $75 million. Favorite's history can best be described as up and down, with the general trend up. The company survived several brief shaky periods during the late 1990s. In 2003, the company went public. (The Favorite family now controls about 57 percent of the common stock.) By 2006, Favorite Foods was recommended by two brokerage firms and was touted by one invest- ment service as "another potential McDonald's." This and other predictions never came true. In fact, Favorite Food Systems' growth rate has slowed appreciably during the past five years. One reason frequently given in the trade for Favorite's growth slowdown is Mr. Favorite's apparent indecision regarding expansion. As a result, the competition has increasingly gotten the jump on Favorite with the best locations in new residential growth areas. The following table shows last year's balance sheets and income statements for both Admiral and Favorite. | Mergers and Acquisitions Admiral Foods Corporation is a diversified food processing and distributing company that has shown excellent growth over the past 10 years as a result of a balanced program of acquisitions and internal growth. One segment of the food business in which Admiral has only recently begun to com- pete, however, is the fast-food business. The present top management of Admiral Foods feels that good future growth in the fast-food business is still possible, regardless of the rapid expansion of the last two decades. During the past year, members of the Admiral staff have examined and analyzed a number of independent fast-food firms. One com- pany that the analysis indicated as potentially suitable for acquisition by Admiral is Favorite Food Systems Inc. Favorite Food Systems Inc. which was founded by John Favorite in 1994, is a West Coast chain with current annual sales of approximately $75 million. Favorite's history can best be described as up and down, with the general trend up. The company survived several brief shaky periods during the late 1990s. In 2003, the company went public. (The Favorite family now controls about 57 percent of the common stock.) By 2006, Favorite Foods was recommended by two brokerage firms and was touted by one invest- ment service as "another potential McDonald's." This and other predictions never came true. In fact, Favorite Food Systems' growth rate has slowed appreciably during the past five years. One reason frequently given in the trade for Favorite's growth slowdown is Mr. Favorite's apparent indecision regarding expansion. As a result, the competition has increasingly gotten the jump on Favorite with the best locations in new residential growth areas. The following table shows last year's balance sheets and income statements for both Admiral and Favorite.