Case Study
China Huiyuan Juice Group Limited
On September 3, 2008, the Coca-Cola Company offered to buy China Huiyuan Juice Group, the nation’s largest juice maker (which is listed in Hong Kong), for 17.92 billion Kong Kong dollars in cash. The acquisition was halted by Chinese regulator. On March 18, 2009, the Ministry of Commerce (MOC) announced that Coca-Cola’s bid to acquire Huiyuan failed to meet the country’s anti-monopoly law. Huiyuan gained 149 percent from the time before the offer announcement to the day before the ministry’s announcement. In mid 2008, in preparation for negotiation with Coca-Cola for a possible deal, the chief financial officer (CFO) of Huiyuan, Mr. Francis Ng, worked to evaluate the intrinsic value of his company. He started with financial planning. In this question, suppose you are the CFO and work on the three-year financial forecast for the period of 2008-2010. With the provided balance sheets and income statements of the years 2005-2007 (available on the course webpage), answer the questions using suitable historical average percentages (of sales). Corporate income is expected to be taxed at the marginal tax rate of 25%. Long-term debt to be paid off in 2008, 2009, and 2010 will be $105 million, $83 million, and $78 million, respectively. (a) Complete the forecast table, using historical average parameters wherever applicable. When external capital is needed, the firm plans to raise equity capital (by selling new shares) to meet the requirement. On the other hand, excess cash occurs when the sources of capital are more than the uses of capital. Assume that cash does not earn interest. Determine Huiyuan’s free cash flows (and cash flow components) for each year. (b) Complete the forecast table under the following conditions: (i) Sales will grow at 24% per year. (ii) The sales percentage for other current liabilities is expected to decline to 41% in future years. (iii) Because of high uncertainty in the timing and the cost of raising equity
On September 3, 2008, the Coca-Cola Company offered to buy China Huiyuan Juice Group, the nation’s largest juice maker (which is listed in Hong Kong), for 17.92 billion Kong Kong dollars in cash. The acquisition was halted by Chinese regulator. On March 18, 2009, the Ministry of Commerce (MOC) announced that Coca-Cola’s bid to acquire Huiyuan failed to meet the country’s anti-monopoly law. Huiyuan gained 149 percent from the time before the offer announcement to the day before the ministry’s announcement. In mid 2008, in preparation for negotiation with Coca-Cola for a possible deal, the chief financial officer (CFO) of Huiyuan, Mr. Francis Ng, worked to evaluate the intrinsic value of his company. He started with financial planning. In this question, suppose you are the CFO and work on the three-year financial forecast for the period of 2008-2010. With the provided balance sheets and income statements of the years 2005-2007 (available on the course webpage), answer the questions using suitable historical average percentages (of sales). Corporate income is expected to be taxed at the marginal tax rate of 25%. Long-term debt to be paid off in 2008, 2009, and 2010 will be $105 million, $83 million, and $78 million, respectively. (a) Complete the forecast table, using historical average parameters wherever applicable. When external capital is needed, the firm plans to raise equity capital (by selling new shares) to meet the requirement. On the other hand, excess cash occurs when the sources of capital are more than the uses of capital. Assume that cash does not earn interest. Determine Huiyuan’s free cash flows (and cash flow components) for each year. (b) Complete the forecast table under the following conditions: (i) Sales will grow at 24% per year. (ii) The sales percentage for other current liabilities is expected to decline to 41% in future years. (iii) Because of high uncertainty in the timing and the cost of raising equity