View the step-by-step solution to:

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...

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
1 1,200,000
2 1,260,000
3 1,323,000
4 1,389,150
5 1,458,608
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?

Given Discount rate 15% Year 5 multiple 6 Debt (0) $2,400,000 Year Cash flows 1 $1,200,000 2 1,260,000 3 1,323,000 4 1,389,150 5 1,458,608 Solution a. Enterprise Value b. Equity Value 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 1 1,200,000 2 1,260,000 3 1,323,000 4 1,389,150 5 1,458,608 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?
Background image of page 1
Sign up to view the entire interaction

Top Answer

Hi Student, Please accept, if you need any other help please... View the full answer

8553258.xls

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...

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask a homework question - tutors are online