Orca Industries is considering the purchase of Shark Manufacturing. Shark is currently a supplier for Orca and the acquisition would allow Orca to better control itsmaterial supply. The current cash flow from assets for Shark is $7 million. The cash flows are expected to grow at 8 percent for the next five years before leveling offto 5 percent for the indefinite future. The costs of capital for Orca and Shark are 12 percent and 10 percent, respectively. Shark currently has 3 million shares of stockoutstanding and $25 million in debt outstanding.What is the maximum price per share Orca should pay for Shark?47.4250.6575.8535.45

Year Previous Cash FlowGrowth Factor(1+Growth Rate)Cash flow for the year(in million) Cash flow/…

Answered: Orca Industries is considering the…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Orca Industries is considering the purchase of Shark Manufacturing. Shark is currently a supplier for Orca and the acquisition would allow Orca to better control its material supply. The current cash flow from assets for Shark is $6.8 million. The cash flows are expected to grow at 5 percent for the next five years before leveling off to 2 percent for the indefinite future. The costs of capital for Orca and Shark are 9 percent and 7 percent, respectively. Shark currently has 3 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Orca should pay for Shark? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price per share
Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $7.1 million. The cash flows are expected to grow at 7 percent for the next five years before leveling off to 4 percent for the indefinite future. The costs of capital for Schultz and Arras are 11 percent and 9 percent, respectively. Arras currently has 3 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Schultz should pay for Arras? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price per share $ 67.63
Orca Industries is considering the purchase of Shark Manufacturing. Shark is currently a supplier for Orca, and the acquisition would allow Orca to better control its material supply. The current cash flow from assets for Shark is $6.4 million. The cash flows are expected to grow at 9 percent for the next five years before leveling off to 6 percent for the indefinite future. The cost of capital for Orca and Shark is 13 percent and 11 percent, respectively. Shark currently has 3 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Orca should pay for Shark? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16, Price per share $ 45 47
Acme is looking to acquire Pinder Co now. Acme is expected to generate annual cash flows of $15,000,000 in perpetuity and Pinder is expected to generate annual cash flows of $6,000,000 in perpetuity. The discount rate for both Acme and Pinder is 8%. If Acme acquires Pinder, Acme expects to be able to reduce operating costs by $4,500,000 for the first five years. However, Acme will also incur integration costs of $3,000,000 in the first year. All cash flows occur at the end of the year. To encourage investment into electric bicycles, the government is offering Acme an option to abandon its operations and sell all related assets for $1 million at the end of year 4. If Acme chooses the option to sell all related assets to the government, it will not receive the cash flows generated from the electric bicycle business in that year. What is the value of this option? Answer based only on the information provided.
Velcro Saddles is contemplating the acquisition of Skiers’ Airbags Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Velcro Saddles is willing to pay $14 million cash for Skiers’. The opportunity cost of capital is 8%. a. What is the gain from the merger? b. What is the cost of the cash offer? c. What is the NPV of the acquisition under the cash offer? Please answer fast i give you upvote.
Velcro Saddles is contemplating the acquisition of Skiers’ Airbags Inc. The values of the two companies as separate entities are $50 million and $25 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $650,000 per year in perpetuity. Velcro Saddles is willing to pay $27 million cash for Skiers’. The opportunity cost of capital is 10%. a. What is the gain from the merger? (Enter your answer in millions rounded to 2 decimal places.) b. What is the cost of the cash offer? (Enter your answer in millions.) c. What is the NPV of the acquisition under the cash offer? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
Cameron Enterprises, Inc. is considering launching a new corporate project. The company will have to make Capital Investments, Working Capital investments, andgenerate Cash Flows from Operating the new project. The Equipment required for theproject will cost $3,000,000 today, will last for three years (the length of the project),and is estimated at the time of purchase to sell for $300,000 at the end of its life. Revenue is projected at $5.0M in the first year, $5.3M in the second year, $5.6M in the third year, $5.9 in the fourth year, $6.0M in the fifth year, and $5.0M in the final year. The investment in Net Working Capital is $300,000 initially, with the year-end values at 10% of that year's sales. The company uses Straight-Line depreciation and has a Tax Rate of 27%. The appropriate discount rate for the risks involved is 10%. Per your DCF analysis of the project, what is the cash flow from the change in net working capital in year six? Multiple Choice None of the…
Velcro Saddles is contemplating the acquisition of Skiers Airbags Incorporated. The values of the two companies as separate entities are $46 million and $23 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $630,000 per year in perpetuity, Velcro Saddles is willing to pay $28 million cash for Skiers'. The opportunity cost of capital is 7%. What is the gain from the merger? Note: Enter your answer in millions rounded to 2 decimal places. What is the cost of the cash offer? Note: Enter your answer in millions. What is the NPV of the acquisition under the cash offer? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.
Midland Corporation has a net income of $13 million and 6 million shares outstanding. Its common stock is currently selling for $49 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of $23,265,000. The production facility will not produce a profit for one year, and then it is expected to earn a 12 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for $45 per share with a spread of 6 percent. a. How many shares of stock must be sold to net $23,265,000? (Note: No out-of-pocket costs must be considered in this problem.) (Do not round intermediate calculations and round your answer to the nearest whole number.) Number of shares b. What are the earnings per share (EPS) and the price-earnings ratio before the issue (based on a stock price of $49)? What will be the price per share immediately after the sale of stock if the P/E stays constant? (Do not round…
RiverRocks (whose WACC is 12.3%) is considering an acquisition of Raft Adventures (whose WACC is 14.8%). The purchase will cost $102.8 million and will generate cash flows that start at $15.7 million in one year and then grow at 3.6% per year forever. What is the NPV of the acquisition? The net present value of the project is $ million. (Round to two decimal places.)
Beetlejuice has 15 million shares outstanding with a current market price of $2 per share. Beetlejuice announces an investment in a project where the initial investment in year 0 is $5 million and the cash inflow for the next five years will be $3 million, after which the investment will generate no cash flows. Beetlejuice’s discount rate for this project is 8%. What is the dollar increase in Beetlejuice’s share price due to the undertaking this investment?
The finance manager of the GZA Ltd is considering a recapitalization plan that would convert GZA from its current all-equity capital structure to one including substantial financial leverage. -GZA now has 10,000,000 ordinary shares outstanding, which are selling for $15 each, and the company’s EBIT is expected to be $12,000,000 per year for the foreseeable future. -The recapitalization proposal is to issue $60,000,000 worth of long-term, perpetual debt at an annual interest rate of 3.0% and use the proceeds to repurchase 4,000,000 ordinary shares worth $60,000,000. Assume perfect capital markets with no market frictions such as corporate or personal income taxes. Calculate the breakeven level of EBIT where the earnings per share are the same under the current and proposed capital structures.

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