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Learning Objectives Project #2 will allow you to apply the material we have studied in the course to a real-life finance problem. Specifically, you or your group will be required to: · Complete an APV...

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Learning Objectives

Project #2 will allow you to apply the material we have studied in the course to a real-life finance problem. Specifically, you or your group will be required to:
· Complete an APV valuation of a potential acquisition target.
· Calculate the valuation impact of a recapitalization on the firm after the acquisition.
· Recommend and support an appropriate offer price for the target firm.
· Fully support your recommendation showing your understanding of acquisition analysis.
Due Date
The Project has two parts.
· Submit Analysis (Excel spreadsheet with formulas) and Question Responses by Sunday, December 15th
at 11:59 PM (AZ time).
Assignment Overview
This project consists of performing an APV analysis first with no change then with a change in capital structure. Please read the information below.
Situation
Bear Down, Inc. (“BDI”) is looking to acquire a distressed pitch fork company based in Phoenix called Devil’s R Us (“DRU”). BDI is a profitable corporate conglomerate with strong free cash flow and the ability to pay cash to fund the acquisition. President Wilma has asked you to evaluate the potential acquisition, and ultimately make a recommendation about whether BDI should purchase DRU and if so, for what price.
From your analysis and evaluation of DRU’s financial statements, you put together the following table of sales forecasts (numbers in millions):
    
    2018
    2019
    2020
    Net Sales
    
    34.50
    42.50
    COGS (75%)
    
    25.88
    31.88
    SG&A
    
    2.25
    2.50
    Interest Expense
    
    2.61
    3.60
You also gathered the following market information:
    Risk Free Rate
    2.4%
    Market Risk Premium
    5.0%
Further analysis led you to determine the following information on DRU:
    Pre-Merger Beta
    1.75
    Pre-Merger % Debt
    35.0%
    Pre-Merger Debt
    $27.5 million
    Pre-Merger Debt Rd
    9.5%
    Tax Rate
    35.0%
Your study of the pitchfork market shows that with the merger and introduction of a new cardinal red and navy blue pitchfork sales will grow strongly for the next two years, but that overall the market is mature, and expected to grow at only a 2% constant rate after 2020. BDI would need to invest $0.5 million in operating capital in 2019 to build the necessary inventory to start sales.
Part One:
Complete an APV valuation analysis for DRU using Excel.
Part Two:
Answer the following questions:
1. Assume that DRU has 1.5 million shares outstanding. What is the maximum price BDI should offer per share? Would you recommend they offer this price (DRU’s cu
ent stock price is $18.75 per share)? Why or why not?
2. Given BDI’s strong balance sheet, they could likely recapitalize DRU with 70% debt at the end of 2 years (this amounts to $75.5 million of debt at the end of 2020 at the same interest rate). What is the value of DRU’s equity with this capital structure? What is the new maximum price per share after recapitalization?
Evaluation Criteria
The case project will be graded based on the following criteria:
    Criteria
    % of Total
Grade
    Part 1
    40%
    Part 2
    50%
    Professional Appearance
    10%
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Answered Same DayDec 09, 2021

Solution

Vasudha answered on Dec 17 2021
50 Votes
Sheet1
    
        APV Analysis
    1    APV Valuation Analysis.
        Tax Rate        35.00%
        CAPM        6.95%
        Terminal Growth Rate        2.00%
        Calculation of Free Cash Flow
                        (in Millions)
                    2019    2020
        Projected...
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