We are in January 2019. A well-diversified equity fund is potentially interested in acquiring Happy and Grow (HAG), a pr

[answerhappygod]

We are in January 2019. A well-diversified equity fund is
potentially interested in acquiring Happy and Grow (HAG), a
privately-held firm. HAG’s owners are asking $250 millionto
sell their equity investmentin the firm. Based on the
information and assumptions provided below, the fund manager would
like to know whether the acquisition is a value-creating
proposition for the fund.
BALANCE SHEETS
December 31, 2017 and December 31, 2018
($ millions)
ASSETS
LIABILITIES and EQUITY
Dec. 2017
Dec. 2018
Dec. 2017
Dec. 2018
Cash (all excess cash)
20.00
20.00
Short-term Debt
10.00
15.00
Accounts Receivable
80.00
90.00
Accounts Payable
90.00
100.00
Inventories
100.00
110.00
Long-term Debt
85.00
80.00
Net Fixed Assets
100.00
110.00
Equity Capital
105.00
135.00
TOTAL
300.00
330.00
TOTAL
300.00
330.00
INCOME STATEMENT
Year ending December 31, 2018
($ millions)
Sales revenues
600.00
Cost of Goods Sold
480.00
Selling, Administrative & General Expenses
60.00
Depreciation expense
20.00
Interest expense
8.00
Tax expense (at a tax rate of 40%)
12.80
Net Income
19.20
Assumptions
The buyer is valuing EAC based on a target capital
structurewith 40% debt financing(debt as a percentage of all
funding) and a cost of debtof 8%and a cost of equityof
9.3%.
All cash-flows occur at the end of the calendar year.
Answer the following 5 questions:
(5points) What is the Free Cash Flow that HAG generated in
2018?
(2 points) What is HAG’s WACC?
(9 points) If the HAG is under current management, the following
performance parameters are expected:
For the years 2019 - 2023
Annual revenue growth
4%
EBIT margin
7%
Cash as a % of revenue
2%
WCR as a % of revenue
18%
NFA as % of revenue
18%
Conitnuing/Terminal value growth rate
2%
What is HAG’s WACC? What is HAG’s estimated enterprise value on
December 31, 2018?
(Please show your calculation for FCFs, TV, and EV)
(3 points) What is HAG’s estimated enterprise value on January
1st, 2019 if a similar company has generated a year-end EBITDA
of $80 million in 2018 and had an estimated enterprise value
of $416 million on January 1st, 2019? Compare your answer to the
estimated enterprise value you found in the previous question.
(5 points) Is the acquisition a value-creating proposition for
the fund? Explain your answer.