Flinder

GUIDED ANSWER

ASSIGNMENT:

Assume that you are employed by RSE’s financial department and that you are charged with performing financial analysis of the merger with FVC. You are given the data that are included as Exhibits 1 through 10 in the case study. Your tasks are as follows.

1. Estimate the value of FVC to RSE using the discounted cash flow (DCF) valuation method discussed in class. Your estimates should include: expected future free cash flows to the firm (FFCF), weighted average cost of capital (WACC), terminal value, enterprise value, value of non-operating assets, firm value, equity value, and share value. Assume that the terminal growth rate of about 6% is appropriate but do a sensitivity analysis to the changes in the terminal growth rate and the WACC. How does a change in the terminal growth rate by 0.5% or 1% affect the share value? How does a change in the WACC by 0.5% or 1% affect the share value? {Note: You will not need to project financial statements to calculate FFCF; the projections for FVC are already given in the case Exhibit 10. The account “Net working capital” in Exhibit 10 stands for operating current assets less operating current liabilities. Since the data for gross PPE (gross property plant and equipment, or gross fixed assets) is not given, calculate capital expenditure as increase in net PPE plus current year depreciation (this is equivalent to calculating capital expenditure as increase in gross PPE).}

2. Assume that RSE expects two kinds of synergy benefits that arise from the deal. First, RSE’s greater purchasing power would lower the cost of material and components. Second, RSE’s six sigma quality control could be expected to reduce FVC’s in-process costs. These savings would likely lower FVC’s projected cost of goods sold from 74% of sales to 72% of sales in the first year following the acquisition and to 70% of sales thereafter. Estimate the share value of FVC to RSE with these synergy benefits assumed in your model...