Meg Whalen, a financial analyst for Cheek Products, Inc., believes two major changes are needed at the company. First, she thinks that the company would be better off if it sold several divisions and concentrated on its core competencies in snack foods and security systems. Second, the company is financed entirely with equity. Because the cash flows of the company are relatively steady, Meg thinks the company's debt-equity ratio should be at least 0.25.
Meg has suggested a potential LBO to her partners, who have asked Meg to provide projections of the cash flows for the company. Here are Meg's estimates:
2015 2016 2017 2018 2019 Sales 2,749 3,083 3,322 3,400 3,539 Costs 731 959 1,009 1,091 1,149 Depreciation 485 516 537 564 575 EBT 1,533 1,608 1,776 1,745 1,815 CapEx 279 242 304 308 304 Change in NWC -122 -186 101 95 108 Asset Sales 1,419 1,028 n.a. n.a. n.a.
At the end of the five years, Meg estimates that the growth rate in cash flows will be 3.50% per year. The CapEx are for new projects and the replacement equipment that wears out. Additionally, the company would realize cash flow from the sale of several divisions. Even though the company will sell these divisions, overall sales should increase because of a more concentrated effort on the remaining divisions.
Meg is also aware that they will have to borrow a considerable amount of the purchase price. The interest payments on the debt for each of the next five years if the LBO is undertaken will be these (in millions):
2015 2016 2017 2018 2019 Interest Payments 1,927 1,859 2,592 2,526 2,614
The company currently has a required return on assets of 14 percent. Because of the high debt level, the debt will carry a yield to maturity of 12.50% for the next five years. When the debt is refinanced in five years, they believe the new yield to maturity will be 8.00%. The company currently has 425 million shares of stock outstanding that sell for $29 per share. The corporate tax rate is 40%. If the partners decide to undertake the LBO, what is the most they should offer per share?
Meg Whalen, a financial analyst for Cheek Products, Inc., believes two major changes are needed at the company. First, she thinks that the company would be better off if it sold several divisions and concentrated on its core competencies in snack foods and security systems. Second, the company is financed entirely with equity. Because the cash flows of the company are relatively steady, Meg thinks the company's debt-equity ratio should be at least 0.25.
Meg has suggested a potential LBO to her partners, who have asked Meg to provide projections of the cash flows for the company. Here are Meg's estimates:
| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Sales | 2,749 | 3,083 | 3,322 | 3,400 | 3,539 |
| Costs | 731 | 959 | 1,009 | 1,091 | 1,149 |
| Depreciation | 485 | 516 | 537 | 564 | 575 |
| EBT | 1,533 | 1,608 | 1,776 | 1,745 | 1,815 |
| CapEx | 279 | 242 | 304 | 308 | 304 |
| Change in NWC | -122 | -186 | 101 | 95 | 108 |
| Asset Sales | 1,419 | 1,028 | n.a. | n.a. | n.a. |
At the end of the five years, Meg estimates that the growth rate in cash flows will be 3.50% per year. The CapEx are for new projects and the replacement equipment that wears out. Additionally, the company would realize cash flow from the sale of several divisions. Even though the company will sell these divisions, overall sales should increase because of a more concentrated effort on the remaining divisions.
Meg is also aware that they will have to borrow a considerable amount of the purchase price. The interest payments on the debt for each of the next five years if the LBO is undertaken will be these (in millions):
| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Interest Payments | 1,927 | 1,859 | 2,592 | 2,526 | 2,614 |
The company currently has a required return on assets of 14 percent. Because of the high debt level, the debt will carry a yield to maturity of 12.50% for the next five years. When the debt is refinanced in five years, they believe the new yield to maturity will be 8.00%. The company currently has 425 million shares of stock outstanding that sell for $29 per share. The corporate tax rate is 40%. If the partners decide to undertake the LBO, what is the most they should offer per share?
