In the summer of 2013, A industries was evaluating whether or not to purchase one of its suppliers, the supplier, B Manufacturing, provides A with the raw steel A uses to fabricate utility trailers. One of the first things that A’s management did was to forecast the cash flows of B for the next five years:
Year cash flows
Next, A’s management team looked at a group of similar firms and estimated B’s cost of capital to be 15%. Finally, they estimated that B would be worth approximately six times its year 5 cash flow in five years.
a. What is your estimate of the enterprise value of B Manufacturing?
b. What is the value of the equity of B Manufacturing if the acquisition goes through and A borrows $2.4 million and finances the remainder using equity?
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