Cases in Finance
A Mini Case of Little Stone Comapny
Question-1
Big Rock Corporation (BRC) announces a tender offer for all the shares of Little Stone Company (LSC) for $16 per share. The pre-announcement (one month before) price of LSC was $12. LSC stock quickly rose to $15.50. Previous similar acquisitions by peers paid an average premium of 20%.
Financial information on Little Stone Company:
Beta 1.5
Stock market risk premium 11%
Risk free rate 3%
Current interest rate on debt 15%
Tax rate 33.3%
Capital Structure 50% debt and 50% equity
Shares outstanding 2.5 million
Long-real growth rate 2%
Long-term inflation rate 2%
Debt outstanding $1,500,000 and excess cash $500,000
Forecasted gross profit margin 25%
Current year free cash flow (FCF) $2 million
LSC’s 5-year forecasted FCF growth rates 10% next year, 15% next two years, and 12% the following two years
Projected synergy: Revenue enhancement of 4.8 million/year from more volume (immediate benefit because sales will come from BRC’s long-time customers)
Determine the price of LSC. Do you think that this is a fair price? You are advising LSC; only considering price, should LSC accept or reject this offer?
Question 2
Vanguard Office Supplies (VOS) is a nationwide retail chain that offers office supplies and office furniture. Company management has decided that, from both a competitive and a cost-cutting view, Vanguard should offer its own private-label brands for products like student notebooks, fillers, ledgers and journals. To accomplish this objective, Vanguard is considering the purchase of Omega Paper, a manufacturer of paper products and notebooks. A five year income forecast for Omega is given below. Vanguard plans to keep Omega’s debt-equity ratio at its current level.
Year 1 Year 2 Year 3 Year 4 Year 5
Operating Cash Flow after tax 69 65.7 -2.7 33.9 67.9
Capital Expenditures 1.8 4.2 0.2 3.8 4.7
Other information:
Other
Question-1
Big Rock Corporation (BRC) announces a tender offer for all the shares of Little Stone Company (LSC) for $16 per share. The pre-announcement (one month before) price of LSC was $12. LSC stock quickly rose to $15.50. Previous similar acquisitions by peers paid an average premium of 20%.
Financial information on Little Stone Company:
Beta 1.5
Stock market risk premium 11%
Risk free rate 3%
Current interest rate on debt 15%
Tax rate 33.3%
Capital Structure 50% debt and 50% equity
Shares outstanding 2.5 million
Long-real growth rate 2%
Long-term inflation rate 2%
Debt outstanding $1,500,000 and excess cash $500,000
Forecasted gross profit margin 25%
Current year free cash flow (FCF) $2 million
LSC’s 5-year forecasted FCF growth rates 10% next year, 15% next two years, and 12% the following two years
Projected synergy: Revenue enhancement of 4.8 million/year from more volume (immediate benefit because sales will come from BRC’s long-time customers)
Determine the price of LSC. Do you think that this is a fair price? You are advising LSC; only considering price, should LSC accept or reject this offer?
Question 2
Vanguard Office Supplies (VOS) is a nationwide retail chain that offers office supplies and office furniture. Company management has decided that, from both a competitive and a cost-cutting view, Vanguard should offer its own private-label brands for products like student notebooks, fillers, ledgers and journals. To accomplish this objective, Vanguard is considering the purchase of Omega Paper, a manufacturer of paper products and notebooks. A five year income forecast for Omega is given below. Vanguard plans to keep Omega’s debt-equity ratio at its current level.
Year 1 Year 2 Year 3 Year 4 Year 5
Operating Cash Flow after tax 69 65.7 -2.7 33.9 67.9
Capital Expenditures 1.8 4.2 0.2 3.8 4.7
Other information:
Other