Simulation Problem for MGMT 595 Extrapolation of the Growing for Broke Case (HBS Publishing) Should Paragon Acquire MonitoRobotics? ASSIGNMENT: the deliverable is a series of three spreadsheets (3) and an explanation (justification) of your assumptions in each. The spreadsheets will show 5-year EPS projections for Paragon if they don't merge MonitoRobitics (MR) if they don't merge Paragon if it acquires MR Based on your analysis, explain whether you would make the acquisition. Expect to be required to defend your analysis individually and orally in class in about a 5 minute session. Using the data below and any observations you think would warrant a change in gross or operating margins, construct a spreadsheet that projects the income statement for five years for both companies assuming they do not merge, and one spreadsheet showing the merger. As a small company scales-up, expansion of gross margin is expected and SGA as a percent of sales normally decreases. Notice these trends in MR's income statement. Determine a purchase price for MonitoRobotics (MR) based on data given, and show how you would pay for it. You MUST, use debt and equity but not cash shown on the balance sheet for the purchase. To the extent you use equity, be sure to show how the issue of incremental shares will impact earnings per share. Likewise, if you use debt, be sure to show the impact of debt (additional interest) on the projected income statement. You will want to turn in the spreadsheets and an explanation of whether you would pursue the acquisition further. You will need to build in assumptions (about growth rates of revenues, purchase price, margins, etc.). Be sure to state them explicitly AND THE RATIONALE behind them. In many ways, the most critical aspect of modeling is being able to support your assumptions. Note: In year C-1, (current year minus one year) Paragon closed an acquisition of Dover Machine Tools to expand their product line, thus accounting for the significant increase in revenues and related expenses over year C-2. "Current" year means the year just completed. PARAGON'S INCOME STATEMENT (MILLIONS) YEAR Current C-1 C-2 Sales 624 580 480 COGS 430 405 348 Gross Profit 194 175 132 GSA 120 116 101 Op. Income (EBIT) 74 59 82 Interest expense 40 40 15 Taxes Net Income 10 13 0 24