Fabricare Case 36

1. If Roy Tyson were to acquire Fabricare, the maximum amount he could pay for the firm would be 154,088.

2.

a. In the valuation the book value of the assets to be acquired should serve as a benchmark for the starting point at which to look at potential prices. Book value should not be used as the final price, but it gives Roy an estimate on where the company is at the moment. It shows the current cash flows of the company being evaluated

b. Price to Earnings ratios for the publicly traded building maintenance firms shows Roy how the competition is handling. Seeing as Fabricare is a private company, he would not have to manage a price to earnings ratio, however, it does affect how well he is able to capture more market shares.

c. The market value as a percentage of sales for the publicly trade firms show Roy how the market is doing in this city. If there is availability for some move for more market power, Fabricare seems worth more money as an investment.

d. The estimate of the value of Fabricare under current management plays a role by evaluating the growth potential for Fabricare. If the current management is pushing the company to be as profitable as possible, and little growth is showing, then the price may seem less appealing. The opportunity is key for Roy. Current management is settled with little growth, but with market opportunity as a private company, the price for Roy may be a good investment to spend some extra money on.

3. At this point, I would recommend Roy start negotiations at 212,000 using a growth rate of 5%. This shows the potential growth of the company along with its current value.

FCF0 | 154,000 |

WACC | 0.15 |

g | 0.05 |

marketable securities |

debt | 12500 |

preferred stock | 0 |

book value of equity | 112,840 |

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tax rate | 0.3 |

| |

VOP= | 2002000 |

total corporate value | 2058167 |

value of equity= | 2045667 |

MVA= | 1932827 |

2,212,167