Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe's Party Supply. Happy Times currently has debt outstanding with a market value of $120 million and a YTM of 6.8 percent. The company's market capitalization is $260 million and the required return on equity is 15 percent. Joe's currently has debt outstanding with a market value of $25.5 million. The EBIT for Joe's next year is projected to be $17 million. EBIT is expected to grow at 10 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 9 percent, 15 percent, and 8 percent, respectively. Joe's has 2.15 million shares outstanding and the tax rate for both companies is 25 percent.
Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe's Party Supply. Happy Times currently has debt outstanding with a market value of $120 million and a YTM of 6.8 percent. The company's market capitalization is $260 million and the required return on equity is 15 percent. Joe's currently has debt outstanding with a market value of $25.5 million. The EBIT for Joe's next year is projected to be $17 million. EBIT is expected to grow at 10 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 9 percent, 15 percent, and 8 percent, respectively. Joe's has 2.15 million shares outstanding and the tax rate for both companies is 25 percent.
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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Transcribed Image Text:Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order
to establish an immediate presence in the area, the company is considering the
purchase of the privately held Joe's Party Supply. Happy Times currently has debt
outstanding with a market value of $120 million and a YTM of 6.8 percent. The
company's market capitalization is $260 million and the required return on equity is 15
percent. Joe's currently has debt outstanding with a market value of $25.5 million. The
EBIT for Joe's next year is projected to be $17 million. EBIT is expected to grow at 10
percent per year for the next five years before slowing to 3 percent in perpetuity. Net
working capital, capital spending, and depreciation as a percentage of EBIT are
expected to be 9 percent, 15 percent, and 8 percent, respectively. Joe's has 2.15 million
shares outstanding and the tax rate for both companies is 25 percent.
a. What is the maximum share price that Happy Times should be willing to pay for Joe's?
(Do not round intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
b. After examining your analysis, the CFO of Happy Times is uncomfortable using the
perpetual growth rate in cash flows. Instead, she feels that the terminal value should
be estimated using the EV/EBITDA multiple. The appropriate EV/EBITDA multiple is
8. What is your new estimate of the maximum share price for the purchase? (Do not
round intermediate calculations and round your answer to 2 decimal places, e.g.,
32.16.)
Answer is complete but not entirely correct.
a. Maximum share price
$
53.57
b. Maximum share price
$
51.87 x
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