Your firm has signed a letter of intent to acquire RGBG Inc. which specialized in the...
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Your firm has signed a letter of intent to acquire RGBG Inc. which specialized in the production and distribution of alternative music technologies. The most recent financial statements for RGBG have just been released. The following information about RGBG Inc. is available to your firm's valuation team. Current Financial Information (in $) Net Income Depreciation Expenses Interest Expenses Dividends Paid Effective Tax Rate 2,000,000 400,000 250,000 100,000 35% Apart from equity, RGBG Inc has senior debt currently valued at $12,000,000 and junior debt currently valued at $3,500,000. Based on your analysis, you have estimated the following: ● The non-depreciation FCF will grow at real rates of 30% in Year 1, 20% in Year 2, and 15% in Year 3. After this period, the non-depreciation FCF will grow at a constant real rate of 10% per year, forever. The depreciation expense, which you know is virtually risk-free, will grow at a nominal rate of 8% per year, forever. The effective tax-rate will remain at 35%. Your team has also estimated the real risky rate to be 20% and expects the annual inflation rate to be 5%. The real risk-free rate is 4% and all cash flows are mid- year cash flows. A. Compute the non-depreciation tax shield FCF realized during years 1, 2, and 3. B. Compute the appropriate discount rates for the depreciation tax-shield and for the non-depreciation tax shield FCF, respectively. C. Compute the intrinsic value of the firm. D. What is your estimate of RGBG's share price if it currently has 2 million shares outstanding? Your firm has signed a letter of intent to acquire RGBG Inc. which specialized in the production and distribution of alternative music technologies. The most recent financial statements for RGBG have just been released. The following information about RGBG Inc. is available to your firm's valuation team. Current Financial Information (in $) Net Income Depreciation Expenses Interest Expenses Dividends Paid Effective Tax Rate 2,000,000 400,000 250,000 100,000 35% Apart from equity, RGBG Inc has senior debt currently valued at $12,000,000 and junior debt currently valued at $3,500,000. Based on your analysis, you have estimated the following: ● The non-depreciation FCF will grow at real rates of 30% in Year 1, 20% in Year 2, and 15% in Year 3. After this period, the non-depreciation FCF will grow at a constant real rate of 10% per year, forever. The depreciation expense, which you know is virtually risk-free, will grow at a nominal rate of 8% per year, forever. The effective tax-rate will remain at 35%. Your team has also estimated the real risky rate to be 20% and expects the annual inflation rate to be 5%. The real risk-free rate is 4% and all cash flows are mid- year cash flows. A. Compute the non-depreciation tax shield FCF realized during years 1, 2, and 3. B. Compute the appropriate discount rates for the depreciation tax-shield and for the non-depreciation tax shield FCF, respectively. C. Compute the intrinsic value of the firm. D. What is your estimate of RGBG's share price if it currently has 2 million shares outstanding?
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A Compute the nondepreciation tax shield FCF realized during years 1 2 and 3 Taxable Income Net Income Depreciation Expenses Interest Expenses Dividen... View the full answer
Related Book For
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey
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