The Carthage Corporation is currently (1/1/2018) considering the acquisition of the stock of LaGoulette Snowmobiles Inc....

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The Carthage Corporation is currently (1/1/2018) considering the acquisition of the stock of LaGoulette Snowmobiles Inc. The financial statements for LaGoulette for the year ending 12/31/2017 are: Income Statement Balance Sheet Sales $200,000| Current Assets $15,000 Cost of goods sold -120,000 Property, Plant & Equipment 40,000 Gross profit $80,000 Total $55,000 Operating expenses -30,000 Depreciation -8,000 Accruals & Payables $5,000 EBIT $42,000 Long-term debt 25,000 Interest expense -1,000 Equity (25 000 shares, $1 par) 25,000 Earnings before taxes $41,000 Total 55,000 Taxes (40%) -16,400 $24,600 $24,600 Net income Dividends The estimated Beta for LaGoulette's stock is 1.2. The yields on 3-month and 20-year government securities are 8% and 10%. The expected market returns in excess of 3-month and 5-year government securities are 6% and 8%. LaGoulette's stock is currently trading at $10/share. Questions a. What is the estimated cost of equity of LaGoulette Stock? b. What rate of growth does the market seem to be expecting for the dividends? c. Carthage believes that it can bring the COGS from 60% down to 55% and can in addition achieve a perpetual annual growth rate (using the growth rate in question b) on all other items on the balance sheet and Income Statements. Carthage believes that this performance can be achieved beginning in 2018. Assuming that the return on equity in (a) does not change with these revised expectations, what will LaGoulette 's equity be worth using FCFE? d. Carthage is contemplating the following takeover deal. First, a cash tender offer for 50% of LaGoulette's shares at $12/share. For the remaining shares, Carthage plans to offer one share of newly issued preferred stock for each share of LaGoulette. The preferred stock will have a par value of $14, a dividend of $1.80 and an estimated market value of $14. Is it a profitable acquisition from the viewpoint of Carthage's (common) shareholders? Justify your answer. The Carthage Corporation is currently (1/1/2018) considering the acquisition of the stock of LaGoulette Snowmobiles Inc. The financial statements for LaGoulette for the year ending 12/31/2017 are: Income Statement Balance Sheet Sales $200,000| Current Assets $15,000 Cost of goods sold -120,000 Property, Plant & Equipment 40,000 Gross profit $80,000 Total $55,000 Operating expenses -30,000 Depreciation -8,000 Accruals & Payables $5,000 EBIT $42,000 Long-term debt 25,000 Interest expense -1,000 Equity (25 000 shares, $1 par) 25,000 Earnings before taxes $41,000 Total 55,000 Taxes (40%) -16,400 $24,600 $24,600 Net income Dividends The estimated Beta for LaGoulette's stock is 1.2. The yields on 3-month and 20-year government securities are 8% and 10%. The expected market returns in excess of 3-month and 5-year government securities are 6% and 8%. LaGoulette's stock is currently trading at $10/share. Questions a. What is the estimated cost of equity of LaGoulette Stock? b. What rate of growth does the market seem to be expecting for the dividends? c. Carthage believes that it can bring the COGS from 60% down to 55% and can in addition achieve a perpetual annual growth rate (using the growth rate in question b) on all other items on the balance sheet and Income Statements. Carthage believes that this performance can be achieved beginning in 2018. Assuming that the return on equity in (a) does not change with these revised expectations, what will LaGoulette 's equity be worth using FCFE? d. Carthage is contemplating the following takeover deal. First, a cash tender offer for 50% of LaGoulette's shares at $12/share. For the remaining shares, Carthage plans to offer one share of newly issued preferred stock for each share of LaGoulette. The preferred stock will have a par value of $14, a dividend of $1.80 and an estimated market value of $14. Is it a profitable acquisition from the viewpoint of Carthage's (common) shareholders? Justify your answer.

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Answers a The estimated cost of equity of LaGoulette Stock can be calculated using the Capital Asset Pricing Model CAPM formula Cost of Equity RiskFre... View the full answer