3e Chapter09_solutions_Prob13.xls

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

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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:

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45a7bdca146f869497e78e2cd7835782417a7355.xls
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%.

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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.
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