Jide Wintoki From: Richard Smith, Scott Mitchell, Zack Gregory Re: Mercury Athletic Acquisition Based on our analysis of Mr. Liedtke’s base case projections for a potential acquisition of Mercury Athletic, we have concluded that this is a positive net present value project, and that AGI should proceed with the acquisition. Under Mr. Liedtke’s operating assumptions, we calculate the value of Mercury’s discounted cash flows to be $624.446 million, and the acquisition price to be $156.643 million, yielding a net present value of $467,804 for AGI. Our calculations indicate that this project becomes even more attractive financially when potential favorable synergies between AGI and Mercury are taken into account. A real options valuation (details below) involving inventory management and the women’s casual line indicates that an additional $22.365 million of value would be created by the successful implementation of fairly simple operating synergies in those two areas alone. Considering that far more possible synergies and savings are a possibility for AGI and Mercury post-acquisition, we believe this acquisition would be an appropriate strategic move for AGI to improve its own performance and to compete on a more level playing field with the larger companies in the industry. Methodology/Supporting Assumptions To estimate the price of acquiring Mercury, we averaged the P/E multiples of comparable companies in the industry and applied that multiple to Mercury’s 2006 net income to arrive at a likely purchase price. P/E was used because we believe it is the most accurate reflection of the market’s view of Mercury’s recent performance and value. Kinsley Coulter and Templeton Athletic were used as the two comparable companies because, along with AGI and Mercury, they are the only other companies in the industry with annual revenue of less than $1 billion (Marina Wilderness also has revenue less than $1 billion, but because it is the fastest- growing company in the industry...

...thereafter). If TecOne investors want a 40 percent rate of return on their investment, calculate the venture’s presentvalue.
B. Now assume that the Year 6 cash flows are forecasted to be $900,000 in the stepping stone year and are expected to grow at an 8 percent compound annual rate thereafter. Assuming that the investors still want a 40 percent rate of return on their investment, calculate the venture’s presentvalue.
C. Now extend Part B one step further. Assume that the required rate of return on the investment will drop from 40 percent to 20 percent beginning in Year 6 to reflect a drop in operating or business risk. Calculate the venture’s presentvalue.
2. Assume the forecasted cash flows presented in Problem 1 for the TecOne Corporation venture also hold for the LowTec venture. However, investors in LowTec have an expected rate of return of 30 percent on their investment until Year 6 when the rate of return is expected to drop to 18 percent. The perpetuity growth rate for cash flows after Year 6 is expected to be 7 percent.
A. Determine the presentvalue for the LowTec venture.
B. If an outside investor offers to invest $1,500,000 dollars today, what percentage ownership in LowTec should be given to the new investor?
3. Ben Toucan, owner of the Aspen BrewPub and Restaurant, wants to determine the...

...investment but low rate investment such as T-bills or bonds.
E) Which of the following is true about the NPV and IRR techniques?
1) The NPV and IRR techniques always provide the same ranking of different investment projects.
2) The NPV and IRR techniques explicitly consider the cost of capital and the time value of money.
3) All projects can have only one value for NPV and one value for IRR.
4) The NPV technique cannot provide information on how acquiring the project will contribute to shareholders’ wealth.
Explanation: NPV calculates presentvalue of investment and opportunity cost of capital and IRR takes time value of money and cost of capital into consideration as well.
F) Which of the following is false?
1) The profitability index method explicitly considers the time value of money and the firm’s cost of capital.
2) The payback period is preferred by managers since it is simple, easy to calculate, and estimates how quickly the project cash flows will return the investment in the project.
3) The disadvantages of the payback period method are that it ignores project cash flows which occur after the payback period as well as the time value of money.
4) The profitability index method always ranks all projects in the same way that the IRR method does.
Explanation: In IRR method projects are accepted if the IRR is greater then...

...Tesca team we were able to create a comprehensive capital budget and cash flow analysis for the proposed refrigerator project.
Through our analysis we found that the cost of capital of the project to be 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive NetPresentValue of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values.
This information seemed to be very promising for the project in general. However, our continued analysis showed the project to be very sensitive to the sales price per unit of the refrigerator. We used the average demand scenario to produce a sensitivity analysis and found that with just a 5% decrease in the sales price of the refrigerator the NPV quickly dipped into a negative value thus showing the project to be extremely sensitive to the sales price of the refrigerator.
Our scenario analysis also exposed a strong probability of the project giving a negative NetPresentValue and giving a probable low Internal Rate of Return of only 4.01%. This is mainly due to the projects sensitivity to the sales price of...

...Netpresentvalue
In finance, the netpresentvalue (NPV) or netpresent worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the presentvalues (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in presentvalue terms, once financing charges are met.
The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.
Formula
Each cash inflow/outflow is discounted back to its presentvalue (PV). Then they are...

...[pic]
AMITY SCHOOL OF DISTANCE LEARNING
Post Box No. 503, Sector-44
Noida – 201303
FINANCIAL MANAGEMENT
Assignment A
Marks 10
Answer all questions.
1.
a. Should the titles of controller and treasurer be adopted under Indian context? Would you like to modify their functions in view of the company practice in India? Justify your opinion?
b. A firm purchases a machinery for Rs. 8,00,000 by making a down payment of Rs.1,50,000 and remainder in equal instalments of Rs. 1,50,000 for six years. What is the rate of interest to the firm?
2.
a.Explain the mechanism of calculating the presentvalue of cash flows..What is annuity due? How can you calculate the present and future values of an annuity due? Illustrate
b.”The increase in the risk-premium of all stocks,irrespective of their beta is the same when risk aversion increases” Comment with practical examples
3.
a.How leverage is linked with capital structure? Take example of a MNC and analyse.
b. The following figures relate to two companies (10)
P LTD. Q LTD.
(In Rs. Lakhs)
Sales 500 1,000
Variable costs 200 300
---- -------
Contribution 300 700
Fixed costs 150 400
---- -------
150. 300
Interest 50 100
---- -------
Profit before Tax 100 200...

...Trident University
Module 5- SLP
FIN501
Dr. Glenn Tenney
NetpresentValue, Mergers and acquisitions
When brainstorming on the possible ideas of mergers or acquisitions it was easy at first to automatically think similar corporations within the same market either small or big or even in direct competition. Upon researching and reviewing the required readings I realized there are numerous types of mergers and acquisitions that could and should be considered in the terms of better business for my company (Target), for the market, and for the consumers in general.
The Target Corporation is an American retailing company. It is the second largest discount retailer behind Walmart. With that being said it would at first be a natural thought maybe to think of a merger with Walmart, but as Target being second to them it wouldn’t necessarily be a merger as it would be an acquisition by Walmart and probably wouldn’t make the most business sense even if both were allowed to remain as separate entities. Beyond that certain regulatory bodies would probably find a merger or acquisition to constitute a monopoly and threaten competition within the respective industry.
So what would be a company worth merging with or acquiring? One such company that comes to mind which I believe would be considered a Horizontal merger would be the Kmart Corporation as they are in direct competition. Kmart is listed as the 3rd largest discount...

...As with any other merger analysis, we need to examine the presentvalue of the incremental cashflows. The cash flow today from the acquisition is the acquisition costs plus the dividends paidtoday, or:Acquisition of Hybrid–$550,000,000Dividends from Hybrid$150,000,000Total–$400,000,000Using the information provided, we can determine the cash flows to Birdie Golf from acquiringHybrid Golf. All earnings not retained are paid as dividends, so the cash flows for the next five yearswill be:
Year 1Year 2Year 3Year 4Year 5
Dividends from Hybrid$38,400,000$12,800,000$29,400,000$41,400,000$59,000,000Terminal value of equity600,000,000Total$38,400,000$12,800,000$29,400,000$41,400,000$659,000,000To discount the cash flows from the merger, we must discount each cash flow at the appropriatediscount rate. The terminal value of the company is subject to normal business risk and should bediscounted at the cost of capital, while the dividends are equity cash flows, and as such, should bediscounted at the cost of equity. The presentvalue of each year’s cash flows, along with theappropriate discount rate for each cash flow is:
Discount rateYear 1Year 2Year 3Year 4Year 5
Dividends16.9%$32,848,589$9,366,578$18,403,643$22,168,806$27,025,856PV of value12.4%334,441,139Total$32,848,589$9,366,578$18,403,643$22,168,806$361,466,995And the NPV of the acquisition is: NPV = –$400,000,000 + 32,848,589 + 9,366,578...

...protect its investment in the case of management failure.
Should Apex make a counter-offer, I would suggest the following terms:
Valuation:
Accessline’s projected revenues in 1999 are $208m. Using the average price/revenue ratio of 3com and Boston Technologies, it seems reasonable to expect an IPO valuation at 3.67 times revenues, producing gross proceeds of $764m with a presentvalue of $116m (using our 60% discount rate). Assuming that Accessline meets this revenue target, and that no future funding is required, Apex will take a slight loss on its required rate of return, barring the voluntary distribution of the dividend from the board of directors, on which we are not offered a seat. The present price per share at such an exit would be approximately $7.84.
However, given Accessline’s historical burn rate, it seems unreasonable to expect the $16m investment produced in Series B to last Accessline until 1999. Assuming Accessline will need another $32m to reach its revenue targets by 1999, Apex takes a much more severe loss relative to its required rate of return. The present price per share at such an exit, assuming the new shares are also offered at $8 per share, would be $6.18 per share.
I therefore suggest using $6 per share as a point for a new valuation of the company, assuming the inclusion/revision of terms as described below.
Rights and Preferences
Apart from the...

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