Q1 (25 points) FMC Corporation, an American chemical manufacturing company headquartered in Philadelphia, Pennsylvania is considering...
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Q1 (25 points) FMC Corporation, an American chemical manufacturing company headquartered in Philadelphia, Pennsylvania is considering acquisition of Cheminova, a European crop protection player. FMC is a public company and Cheminova is a private company. In the most recent year, Cheminova generated $ 1.5 million in after-tax operating income on revenues of $10 million; the firm reported book value of equity of $ 5 million and book value of debt of $2.5 million at the beginning of the year. During the year, the firm invested $ 1 million in a new warehouse for furniture and reported depreciation of $400,000 in its income statement. The firm's only working capital item is its inventory, which increased by $150,000 during the course of the year. You have been asked by the board of FMC corporation to appraise the value of Cheminova and collected the following information on publicly traded counterparts of Cheminova in the same industry: Publicly traded companies have an average levered beta of 1.5 and an average market debt to equity ratio of 25%. The pre-tax cost of borrowing, on average, at these firms is 10%. The marginal tax rate for both private and publicly traded firms is 40%. The treasury bond rate (proxy for risk-free rate) is 5% and the equity risk premium is 4%. Cheminova operates at the industry average debt to equity ratio and shares the same cost of debt. a) Estimate the free cash flow to Cheminova in the most recent year. (5 points) b) Assuming that the firm maintains its existing return on capital and reinvestment rate for the next 3 years, estimate the free cash flow for that period. (7 points) c) Estimate the cost of capital of Cheminova for the next 3 years period. (5 points) d) At the end of year 3, the firm is expected to be in stable growth and grow at 3% a year in perpetuity. In stable growth, the cost of capital for Cheminova is expected to drop to 8% and the return on capital will also decline to 15%. Estimate the terminal value at the end of year 3 and the current value of Cheminova. (8 points) Q1 (25 points) FMC Corporation, an American chemical manufacturing company headquartered in Philadelphia, Pennsylvania is considering acquisition of Cheminova, a European crop protection player. FMC is a public company and Cheminova is a private company. In the most recent year, Cheminova generated $ 1.5 million in after-tax operating income on revenues of $10 million; the firm reported book value of equity of $ 5 million and book value of debt of $2.5 million at the beginning of the year. During the year, the firm invested $ 1 million in a new warehouse for furniture and reported depreciation of $400,000 in its income statement. The firm's only working capital item is its inventory, which increased by $150,000 during the course of the year. You have been asked by the board of FMC corporation to appraise the value of Cheminova and collected the following information on publicly traded counterparts of Cheminova in the same industry: Publicly traded companies have an average levered beta of 1.5 and an average market debt to equity ratio of 25%. The pre-tax cost of borrowing, on average, at these firms is 10%. The marginal tax rate for both private and publicly traded firms is 40%. The treasury bond rate (proxy for risk-free rate) is 5% and the equity risk premium is 4%. Cheminova operates at the industry average debt to equity ratio and shares the same cost of debt. a) Estimate the free cash flow to Cheminova in the most recent year. (5 points) b) Assuming that the firm maintains its existing return on capital and reinvestment rate for the next 3 years, estimate the free cash flow for that period. (7 points) c) Estimate the cost of capital of Cheminova for the next 3 years period. (5 points) d) At the end of year 3, the firm is expected to be in stable growth and grow at 3% a year in perpetuity. In stable growth, the cost of capital for Cheminova is expected to drop to 8% and the return on capital will also decline to 15%. Estimate the terminal value at the end of year 3 and the current value of Cheminova. (8 points)
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Related Book For
Essentials Of Statistics For Business & Economics
ISBN: 9780357045435
9th Edition
Authors: David R. Anderson, Dennis J. Sweeney, Thomas A. Williams, Jeffrey D. Camm, James J. Cochran
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