A buyer approached you and expressed his interest in buying your firm. The buyer estimates that your firm is worth $10 million. However, your estimation of your firm's value is $12 million. Based on your knowledge, sales growth is most likely to be 12 percent per year, and you expect the EBITDA to sales ratio to be 10 percent. However, the buyer estimates that sales growth will be 10 percent and expects the EBITDA to sales ratio to be 8 percent. Both agree on a 6 percent discount rate, and your firm's sales for the current year is $55 million. To bridge the gap between you and the buyer, both agree on an earnout plan with the following terms: You will get $5 million now plus an earnout. The earnout is based on your firm's EBITDA for the next three years. The earnout contract is as follows: the earnout thresholds are $2 million, $4 million, and $6 million, respectively, for the first, second, and third years (i.e., you get paid all the EBITDA above the thresholds). What is the offer's value from the seller's perspective? Give your answer without the $ sign and in Million

A buyer approached you and expressed his interest in buying your firm. The buyer estimates that your firm is worth $10 million. However, your estimation of your firm's value is $12 million. Based on your knowledge, sales growth is most likely to be 12 percent per year, and you expect the EBITDA to sales ratio to be 10 percent. However, the buyer estimates that sales growth will be 10 percent and expects the EBITDA to sales ratio to be 8 percent. Both agree on a 6 percent discount rate, and your firm's sales for the current year is $55 million. To bridge the gap between you and the buyer, both agree on an earnout plan with the following terms: You will get $5 million now plus an earnout. The earnout is based on your firm's EBITDA for the next three years. The earnout contract is as follows: the earnout thresholds are $2 million, $4 million, and $6 million, respectively, for the first, second, and third years (i.e., you get paid all the EBITDA above the thresholds). What is the offer's value from the seller's perspective? Give your answer without the $ sign and in Million

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 24P

See similar textbooks

Similar questions

You have invested in a business that proudly reports that it is profitable. Your investment of $4800 has produced a profit of $298. The managers think that if you leave your $4800 invested with them, they should be able to generate S298 per year in profits for you in perpetuity. Evaluating other investment opportunities, you note that other long-term investments of similar risk offer an expected return of 8%. Should you remain invested in this firm? The expected return of your investment is %. (Round to one decimal place.)
You are trying to value Lucid Motors using comparables analysis. You believe Lucid Motors should be valued similarly to TSLA and that TSLA is the only reasonable comparison. TSLA is currently trading at 10.7x Enterprise Value/Revenue. Lucid is expected to generate $2.2bn in revenues this year. How mucb should you be willing to value Lucid in terms of enterprise Value (assuming market is correct)? $20.6bn $23.5bn $15.4 bn $21.7 bn
As an analyst for Kingbird Inc., you are responsible for many firms, including ADFC. Currently you have a "hold" recommendation on ADFC. The current price of ADFC is $154. You have conducted an extensive analysis of the industry and you feel that the probability the firm will capture a substantial share of the new market is 25 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a rate of 45 percent per year for the next five years. In that case, the stock price would rise to $234 due to the unusually high growth rate of future earnings. However, you feel there is a 35-percent probability that the firm will face serious difficulties in the near future, in which case the stock price will fall to $114, and the earnings growth rate will drop to 3 percent. There is a 40-percent chance that nothing will change for the firm and its earnings growth rate will remain at 12 percent. Calculate the expected price in the future. (Round intermediate…
You have invested in a business that proudly reports that it is profitable. Your investment of $4000 has produced a profit of $201. The managers think that if you leave your $4500 levested with them, they should be able to generate $291 per year in profits for you in perpetuity. Evaluating other investment opportunites, you note that other long-term investments of similar risk offer an expected return of 7.9%. Should you remain invested in this fr ? The expected ratus of your envestment is__? (Round to one decimal)
You have invested in a business that proudly reports that it is profitable. Your investment of $5,000 has produced a profit of $300. The managers think that if you leave your $5,000 invested with them, they should be able to generate $300 per year in profits for you in perpetuity. Evaluating other investment opportunities, you note that other long-term investments of similar risk offer an expected return of 8%. Should you remain invested in this firm? The expected return of your investment is %. (Round to one decimal place.) (Select from the drop-down menus.) If projects that are similar in horizon and risk are offering an expected return of 8%, then this business earning your opportunity cost of capital, and you should remain invested invest elsewhere
A firm's financial managers are evaluating two potential investments with a cost of $10,000 each. They forecast returns of $3,000 per year for 5 years for Investment A and $4,000 per year for 5 years for Investment B. The returns are more uncertain for B than for A. Which of the following is true? Investment A is better than B according to shareholder wealth maximization criterion. Investment B is better than A according to shareholder wealth maximization criterion. Investment A is better than B according to the profit maximization criterion. Investment B is better than A according to the profit maximization criterion.
You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $7 million. The product will generate free cash flow of $0.76 million the first year, and this free cash flow is expected to grow at a rate of 6% per year. Markum has an equity cost of capital of 10.9%, a debt cost of capital of 5.35%, and a tax rate of 42%. Markum maintains a debt-equity ratio of 0.40. What is the NPV of the new product line (including any tax shields from leverage)? (Round to two decimalplaces.) How much debt will Markum initially take on as a result of launching this product line? (Round to two decimalplaces.) How much of the product line's value is attributable to the present value of interest tax shields? (Round to two decimalplaces.)
You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $8 million. The product will generate free cash flow of $0.71 million the first year, and this free cash flow is expected to grow at a rate of 3% per year. Markum has an equity cost of capital of 11.4%, a debt cost of capital of 7.54%, and a tax rate of 38%. Markum maintains a debt-equity ratio of 0.50. a. What is the NPV of the new product line (including any tax shields from leverage)? b. How much debt will Markum initially take on as a result of launching this product line? c. How much of the product line's value is attributable to the present value of interest tax shields? a. What is the NPV of the new product line (including any tax shields from leverage)? The NPV of the new product line is $ 3.53 million. (Round to two decimal places.) b. How much debt will Markum initially take on as a result of launching this product line?…
You are evaluating the potential purchase of a small business currently generating $ 42,500 of after-tax cashflow. On the basis of a review of similar risk investment opportunities, you must earn 15% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several assumptions about the growth rate of cash flows. What is the firm’s value if cash flows are expected to grow at an annual rate 12% for the first 2 years, followed by a constant rate of 9% from year 3 to infinity?
You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $ 11 million. The product will generate free cash flow of $ 0.73 million the first year, and this free cash flow is expected to grow at a rate of 6% per year. Markum has an equity cost of capital of 11.7 %, a debt cost of capital of 5.79 %, and a tax rate of 26 %. Markum maintains a debt - equity ratio of 0.90. a. What is the NPV of the new product line (including any tax shields from leverage)? b. How much debt will Markum initially take on as a result of launching this product line? c. How much of the product line's value is attributable to the present value of interest tax shields?
Your firm currently has net working capital of $115,000 that it expects to grow at a rate of 4.0% per year forever. You are considering some suggestions that could slow that growth to 3.0% per year. If your discount rate is 16.0%, how would these changes impact the value of your firm? Firm value would increase by $ (Give answer to nearest dollar) Check
You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $11 million. The product will generate free cash flow of $0.76 million the first year, and this free cash flow is expected to grow at a rate of 6% per year. Markum has an equity cost of capital of 10.5%, a debt cost of capital of 5.04%, and a tax rate of 23%. Markum maintains a debt-equity ratio of 0.70. a. What is the NPV of the new product line (including any tax shields from leverage)? b. How much debt will Markum initially take on as a result of launching this product line? c. How much of the product line's value is attributable to the present value of interest tax shields? a. What is the NPV of the new product line (including any tax shields from leverage)? The NPV of the new product line is $ million. (Round to two decimal places.) C...