3e Chapter09_solutions_Prob13.xls

3e Chapter09_solutions_Prob13.xls - Toy Co Enterprise DCF...

Info icon This preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
45a7bdca146f869497e78e2cd7835782417a7355.xls Toy Co. Enterprise DCF Valuation Solution Legend Valuation analysis of a strategic merger & acquisition - Mini-case = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Setting: It is January 2015 and as the Chief Executive Officer of TM Toys Inc. you are evaluating a strategic acquisition of Toy Co. Inc. Toy Co. Inc. designs, manufactures and markets a variety of toy products worldwide through sales to retailers and wholesalers and directly to consumers. Toy Co's closing market value of equity per share on 12/31/09 was $19.49. Your task is to estimate the intrinsic value of Toy Co. Inc.'s equity (on a per share basis) at 12/31/09 using the Enterprise DCF Model; this will assist you with the determining what per share offer to make to Toy Co. Inc.’s shareholders. In performing your analysis keep in mind the following:
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
45a7bdca146f869497e78e2cd7835782417a7355.xls
Image of page 2
Toy Co. Weighted Average Cost of Capital = Value give = Formula/C = Qualitative = Goal Seek = Crystal Ba = Crystal Ba Assumptions Risk Free Rate 0.0466 Beta 0.777 MRP 0.05 Kd - 10k Footnotes 6.13% Solution Cost of Debt Interest rate on lastest senior note 6.13% Tax rate 27.29% kd (1 - t) 4.45% Cost of Equity Risk free rate 4.66% Beta 0.7770 Market risk premium 7.60% ke 10.57% Market Value of Equity ($ in millions) Dilluted Shares outstanding, 12/31/09 422.04 Share price, 12/31/09 $ 19.49 $ 8,225.57 Value of Debt ($ in millions) Cost of debt: Estimated borrowing rate is 6.13% with a marginal tax of 27.29% results in an after-tax cost of debt of 4.5% Cost of equity: Levered equity beta for Toy Co. is .777; using the capital asset pricing model with a 10 year Treasury Bond yield of 4.66% and a market risk premium of 5% produces an estimate of the levered cost of equity of 10.57%. Weighted average cost of capital (WACC): Using the target debt to value ratio of 6.99% the WACC is approximately 10.14%.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Proxy by Book Value, 12/31/06 $ 618.10 $ 618.10 Weighted Average Cost of Capital D/V 6.99% E/V 93.01% D/E 7.51% WACC = Ke(E/V) + Kd(1-t)(D/V) WACC 10.14% Assumptions for WACC are based on the target's capital structure and costs of capital.
Image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern