First Choice Company is seeking buy another firm (MFG) as part of its strategic expansion growth....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
First Choice Company is seeking buy another firm (MFG) as part of its strategic expansion growth. You have been hired as the consultant to value the firm. The current inflation rate in the economy is 3 %. MFG anticipates a growth of 4 % in revenue in the coming years. The shareholders of the target company anticipate return on equity between 6 and 8 %. Banks that lend to companies in the industry quote interest on long term loans at 5% per annum in the long run. As a small company, MFG finances 70% of its operations with equity. Based on research MFG conducted last year, working capital is expected to grow at 1% of revenue while capital assets grow at 2 % per annum. The expected depreciation rate is 5 % per annum. Current Income tax rate is expected to increase by 2 % with no additional increase in deferred tax rate. The research also showed that the average annual short-term loan would be 15,000 with an interest of 10%. MFG's fixed cost is expected to grow at 1% in the coming years. The income statement and balance sheet for the past two years are presented below: MFG Company Income statement for the period ending December 31, 2020 2020 Revenue Production expenses Contribution margin Other expenses: Depreciation 250,000 110,000 140,000 35,000 2019 200,000 100,000 100,000 37,500 Property taxes Interest on long term loan Selling and administrative Interest and bank charges Earnings before taxes: Income tax: Current Deferred Net Earnings Current assets: Cash Accounts receivables Inventories 3,000 9,800 Fixed Assets: Land Building and Equipment 15,000 1,000 63,800 76,200 Balance Sheet as of December 31, 2020 2020 11,430 7,620 57,150 5,000 20,000 150,000 175,000 300,000 700,000 1,000,000 1,175,000 2,800 10,000 14,000 1,000 65,300 34,700 5,205 3,470 26,025 2019 3,500 30,000 120,000 153,500 300,000 750,000 1,050,000 1,203,500 Total Assets Accounts payable 20,000 19,000 Income tax payable 10,000 9,800 Current portion of long-term debt 50,000 51,000 Long-term debt 200,000 220,000 Total Liabilities 280,000 299,800 Equity 895,000 903,700 Note: Building and equipment are stated net of depreciation and amortization Instructions a. Estimate the value of the MFG using the discounted cash flow approach. Due to time constraint, use only 5 years for the estimation. Assume the contribution margin ratio for the current year for the valuation. First Choice Company is seeking buy another firm (MFG) as part of its strategic expansion growth. You have been hired as the consultant to value the firm. The current inflation rate in the economy is 3 %. MFG anticipates a growth of 4 % in revenue in the coming years. The shareholders of the target company anticipate return on equity between 6 and 8 %. Banks that lend to companies in the industry quote interest on long term loans at 5% per annum in the long run. As a small company, MFG finances 70% of its operations with equity. Based on research MFG conducted last year, working capital is expected to grow at 1% of revenue while capital assets grow at 2 % per annum. The expected depreciation rate is 5 % per annum. Current Income tax rate is expected to increase by 2 % with no additional increase in deferred tax rate. The research also showed that the average annual short-term loan would be 15,000 with an interest of 10%. MFG's fixed cost is expected to grow at 1% in the coming years. The income statement and balance sheet for the past two years are presented below: MFG Company Income statement for the period ending December 31, 2020 2020 Revenue Production expenses Contribution margin Other expenses: Depreciation 250,000 110,000 140,000 35,000 2019 200,000 100,000 100,000 37,500 Property taxes Interest on long term loan Selling and administrative Interest and bank charges Earnings before taxes: Income tax: Current Deferred Net Earnings Current assets: Cash Accounts receivables Inventories 3,000 9,800 Fixed Assets: Land Building and Equipment 15,000 1,000 63,800 76,200 Balance Sheet as of December 31, 2020 2020 11,430 7,620 57,150 5,000 20,000 150,000 175,000 300,000 700,000 1,000,000 1,175,000 2,800 10,000 14,000 1,000 65,300 34,700 5,205 3,470 26,025 2019 3,500 30,000 120,000 153,500 300,000 750,000 1,050,000 1,203,500 Total Assets Accounts payable 20,000 19,000 Income tax payable 10,000 9,800 Current portion of long-term debt 50,000 51,000 Long-term debt 200,000 220,000 Total Liabilities 280,000 299,800 Equity 895,000 903,700 Note: Building and equipment are stated net of depreciation and amortization Instructions a. Estimate the value of the MFG using the discounted cash flow approach. Due to time constraint, use only 5 years for the estimation. Assume the contribution margin ratio for the current year for the valuation.
Expert Answer:
Answer rating: 100% (QA)
Part1 Table Or Calculator Function Face Value Of Bond Issuance From Future Value 2500 Bonds X 1000 M... View the full answer
Related Book For
Corporate Finance Core Principles and Applications
ISBN: 978-0077905200
3rd edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford
Posted Date:
Students also viewed these finance questions
-
From the Information Please Almanac, we compiled the following table on U.S. region of birth and political party of the first 44 U.S. presidents. The table uses these abbreviations: F = Federalist,...
-
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...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
A specific purpose statement is not stated in the speech but includes both the general purpose and the topic. It often reveals the intended goal for the audience. O True False
-
How can financial-service customers limit the sharing of their private data by different financial-service firms? In what ways could customer information sharing be useful for financial institutions...
-
Explain how two of the health literacy assessments measure an individuals health literacy.
-
For the simple linear regression model, show that the elements of the hat matrix are \[h_{i j}=\frac{1}{n}+\frac{\left(x_{i}-\bar{x} ight)\left(x_{j}-\bar{x} ight)}{S_{x x}} \text { and } h_{i...
-
The following summarized data (amounts in millions) are taken from the September 27, 2014, and 1.0 3, 4, 6, 7 September 28, 2013, comparative financial statements of Apple Inc., a manufacturer of...
-
ACC 3305 Practice Adjusting and Closing Entries .esiring gniteuibs stings Edwards Engineering adjusts and closes its books at the end of the year to prepare financial statements. The trial balance on...
-
A Head Office in Calcutta has a branch at Haldia. All purchases are made by Head Office and goods sent to the branch are invoiced at cost plus 25%. All cash received by branch is deposited to the...
-
What does the velocity of the three Vs in big data mean? And provide two examples of varying velocity from the industry. Why are data leaders, data scientists, and data entrepreneurs different? Which...
-
Job site clean up is a common area of dispute. Although it may seem minor, it is often a constant struggle that can have monetary impact. As a GC project manager, how can you make sure job site clean...
-
why Rowlandson work is important part of establishing an American literary tradition. You must use specific examples in your response.?
-
what is Ford SUPPLIER risks in reference to risk identification, risk assessment and evaluation, selection of appropriate risk management, risk management strategies, implementation of supply chain...
-
Q5 Question 5 Corporate Governance: Directors' duties (10 marks) What is a fiduciary duty and what specific fiduciary duties does the law impose on company directors generally and under the...
-
How did FCT v Myer Emporium case was compared and contrasted in Whitfords Beach case and Westfield Ltd v FCT?
-
Assume you are the new Marketing Manager for Cadbury Chocolates Australia. (a) In addition to Cadbury's own website, list 3 other sources of information about Cadbury's own chocolate products? (b)...
-
Transform the while loop from the previous exercise into an equivalent for loop (make sure it produces the same output).
-
Dragula, Inc., has debt outstanding with a face value of $3.8 million. The value of the firm if it were entirely financed by equity would be $12.3 million. The company also has 245,000 shares of...
-
The 2009 balance sheet of Maria's Tennis Shop, Inc., showed $730,000 in the common stock account and $6.2 million in the additional paid-in surplus account. The 2010 balance sheet showed $775,000 and...
-
Beckett, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $13,000 if economic conditions are normal. If there is...
-
Nestls financial statements are presented in Appendix B. Financial statements of Delfi Limited are presented in Appendix C. Instructions Refer to the financial statements and answer the following...
-
Writing Financial statement information about four different companies is as follows. Instructions a. Determine the missing amounts. (Hint: For example, to solve for (a), Assets Liabilities = Equity...
-
The financial statements of TSMC are presented in Appendix A. The complete annual report, including the notes to the financial statements, is available at the companys website. Instructions Refer to...
Study smarter with the SolutionInn App