Solomon Entertainment (incorporated in US) is a listed company in the US established by Dr. Seymour...
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Solomon Entertainment (incorporated in US) is a listed company in the US established by Dr. Seymour Kitsch years ago. The company specializes in the production of movies and TV shows where two business operates separately as the following: • Producing movies required large initial investments. Profitability of a movie is highly uncertain. Furthermore, Solomon sold all their movie rights after every movie's first run, in order to raise money for future movie developments. The company bear most of the development cost of the movie. Therefore, the profit of the movie division is volatile with some years in large profit and some other years in deep losses. Furthermore, the company does not own any rights in movies it produced. Sometimes, a buyer will purchase movie rights produced by Solomon Entertainment, where both the payment and the delivery of the movie rights will be in a specific date in the future bounded by a contract. The company is no longer producing TV shows, However, local TV stations have been paying the company for re-runs of old TV shows. The payments have been stable and growing and usually pre-paid with cash. The TV stations bear most of the cost, where it is expected to pay Solomon USD $300 million after cost, growing steadily at 2% per year. Historically. TV stations do not stop re-runs as audiences are happy with shows repeating on TV. Happy Cola, a major global producer of soft drinks is considering buying Solomon Entertainment. Happy Cola CEO recently commented "Happy Cola needs to diversify its revenue source to offset any potential downturn in our own soft drink industry." Happy Cola's CFO Doug Iniesta sets a straight rule: "Happy Cola will only invest in project that has IRR (Internal Rate of Return) above 16%, which is the WACC of Happy Cola." This year, the after-tax profit of Solomon is $200 million USD where there is a loss of $100 million USD from the movie division, and gain of $300 million USD in the TV division. Answer all the following questions based on the given information of the case: (a) Name and elaborate the acquisition/merger strategy by Happy Cola in (5 marks) acquiring Solomon Entertainment. (b) Adrian Au, an investment analyst commented "The buying and delivering (12 marks) of movie rights from Solomon in a future date is an example of a call option, since it is the right to buy, in a future date and at a specific price." Do you agree or disagree? Defend and elaborate your answer with definition of call option and forward contract. (c) Solomon Entertainment is willing to sell only the TV division to Happy (12 marks) Cola. An analyst Bryan Suen proposed "Happy Cola should still use 16% as discount rate to calculate the value of the TV division, since it is Happy Cola's cost of capital." Do you agree or disagree? Defend and elaborate your answer in the context of using cost of capital as discount rate. (d) Happy Cola is planning to issue debt to pay for the acquisition of Solomon (11 marks) Entertainment. Happy Cola is expecting interest rate will remain low or will hear lower. However, buyers of debt are only interested Happy Cola fixed rate debt. Develop and illustrate a strategy of using interest rate swap to transform a Happy Cola fixed rate debt into a floating rate debt. Solomon Entertainment (incorporated in US) is a listed company in the US established by Dr. Seymour Kitsch years ago. The company specializes in the production of movies and TV shows where two business operates separately as the following: • Producing movies required large initial investments. Profitability of a movie is highly uncertain. Furthermore, Solomon sold all their movie rights after every movie's first run, in order to raise money for future movie developments. The company bear most of the development cost of the movie. Therefore, the profit of the movie division is volatile with some years in large profit and some other years in deep losses. Furthermore, the company does not own any rights in movies it produced. Sometimes, a buyer will purchase movie rights produced by Solomon Entertainment, where both the payment and the delivery of the movie rights will be in a specific date in the future bounded by a contract. The company is no longer producing TV shows, However, local TV stations have been paying the company for re-runs of old TV shows. The payments have been stable and growing and usually pre-paid with cash. The TV stations bear most of the cost, where it is expected to pay Solomon USD $300 million after cost, growing steadily at 2% per year. Historically. TV stations do not stop re-runs as audiences are happy with shows repeating on TV. Happy Cola, a major global producer of soft drinks is considering buying Solomon Entertainment. Happy Cola CEO recently commented "Happy Cola needs to diversify its revenue source to offset any potential downturn in our own soft drink industry." Happy Cola's CFO Doug Iniesta sets a straight rule: "Happy Cola will only invest in project that has IRR (Internal Rate of Return) above 16%, which is the WACC of Happy Cola." This year, the after-tax profit of Solomon is $200 million USD where there is a loss of $100 million USD from the movie division, and gain of $300 million USD in the TV division. Answer all the following questions based on the given information of the case: (a) Name and elaborate the acquisition/merger strategy by Happy Cola in (5 marks) acquiring Solomon Entertainment. (b) Adrian Au, an investment analyst commented "The buying and delivering (12 marks) of movie rights from Solomon in a future date is an example of a call option, since it is the right to buy, in a future date and at a specific price." Do you agree or disagree? Defend and elaborate your answer with definition of call option and forward contract. (c) Solomon Entertainment is willing to sell only the TV division to Happy (12 marks) Cola. An analyst Bryan Suen proposed "Happy Cola should still use 16% as discount rate to calculate the value of the TV division, since it is Happy Cola's cost of capital." Do you agree or disagree? Defend and elaborate your answer in the context of using cost of capital as discount rate. (d) Happy Cola is planning to issue debt to pay for the acquisition of Solomon (11 marks) Entertainment. Happy Cola is expecting interest rate will remain low or will hear lower. However, buyers of debt are only interested Happy Cola fixed rate debt. Develop and illustrate a strategy of using interest rate swap to transform a Happy Cola fixed rate debt into a floating rate debt.
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a AcquisitionMerger Strategy by Happy Cola in Acquiring Solomon Entertainment Happy Cola is considering acquiring Solomon Entertainment to diversify its revenue sources and mitigate potential downturn... View the full answer
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