The Gryphon Corporation is contemplating an acquisition of the Mustang Corporation. Both Gryphon Corp. and Mustang...

 

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The Gryphon Corporation is contemplating an acquisition of the Mustang Corporation. Both Gryphon Corp. and Mustang Corp. have a cost of equity of 16%, cost of debt of 8%, and 25% debt. The 2020 Mustang Corp. income statement is provided below: Total Revenue Cost of Goods Sold Selling and Administrative Expenses Amortization Operating Income (EBIT) Interest Expense Earnings before Taxes (EBT) Income Tax Net Income $500,000 350,000 25,000 50,000 75,000 25,000 50,000 15,000 35,000 a. Find the expected free cash flows for 2021-2023, under the following assumptions: Revenues will grow by (10 + B) % per year COGS will continue to be 70% of revenues Selling and Administrative Expenses will continue to be 5% of revenues Amortization will remain constant at $50,000 per year Tax Rate is 30% Capital expenditures will be 10% of total revenue b. Calculate the weighted average cost of capital to be used to discount the cash flows. c. If Mustang's free cash flows are expected to grow at 5% per year after 2023, what value should Gryphon Corp. be willing to pay for the stock of Mustang Corp.? The Gryphon Corporation is contemplating an acquisition of the Mustang Corporation. Both Gryphon Corp. and Mustang Corp. have a cost of equity of 16%, cost of debt of 8%, and 25% debt. The 2020 Mustang Corp. income statement is provided below: Total Revenue Cost of Goods Sold Selling and Administrative Expenses Amortization Operating Income (EBIT) Interest Expense Earnings before Taxes (EBT) Income Tax Net Income $500,000 350,000 25,000 50,000 75,000 25,000 50,000 15,000 35,000 a. Find the expected free cash flows for 2021-2023, under the following assumptions: Revenues will grow by (10 + B) % per year COGS will continue to be 70% of revenues Selling and Administrative Expenses will continue to be 5% of revenues Amortization will remain constant at $50,000 per year Tax Rate is 30% Capital expenditures will be 10% of total revenue b. Calculate the weighted average cost of capital to be used to discount the cash flows. c. If Mustang's free cash flows are expected to grow at 5% per year after 2023, what value should Gryphon Corp. be willing to pay for the stock of Mustang Corp.?

Answer rating: 100% (QA)

ANSWER a Using the information provided we can calculate the expected free cash flows for 20212023 a... View the full answer