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Case
Core Industries is considering acquiring Duo Systems through a hostile takeover. Their plan is to mak
directly to the shareholders of Duo Systems. Eva Fox, a financial analyst with Core, has been asked t
acquisition price for the offer. Fox has considered using three different valuation methods to estimat
price and has gathered the required financial data for this purpose.
Pro Forma Income Statement and Other Financial Data for Duo Systems
Income Statement (in $ 000)
FY 01
FY 02
Revenue
10,000
11,000
COGS
5,500
6,500
Gross Profit
4,500
4,500
SG&A
1,300
1,550
Depreciation
450
490
EBIT
2,750
2,460
Net Interest Expense
700
660
EBT
2,050
1,800
Income Tax
855
768
Net Income
1,195
1,032
Other Financial Data (in $ 000)
Change in Working capital
Change in deferred Taxes
Capital Expenditures
384
17
1,104
415
19
1,192
FY 03
12,500
7,500
5,000
1,700
530
2,770
600
2,170
1,041
1,129
452
22
1,300
Duo Systems has 1 million shares outstanding. From sixth year onwards, Fox expects Duos free cash
constant rate of 7% per year. She also determines that Duos weighted average cost of capital of 9.5
appropriate discount rate to use for the analysis.
Fox did some research and found three companies from the same industry as Duo, and with a simila
Mouse Corporation, Pad Inc., and Wire Dynamics. In addition, Fox could gather data for three takeove
characteristics similar to DuoPage Corporation, Cover Industries, and Wrap Corp. Data gathered by
the following figure.
Duo Systems
33.00
1.80
10.20
30.10
Mouse
Corporation
55.00
2.75
16.95
51.80
Pad Inc.
38.00
2.15
12.20
37.65
Page Corporation
18.20
21.80
1.10
6.25
17.50
Cover Industries
26.95
33.80
1.70
10.15
27.10
Wrap Corp
42.80
53.15
2.50
14.00
39.95
Calculate the appropriate valuation metrics and using the mean of those metrics, and estimate the p
Industries should pay for the Duo System using DFC, comparable company and comparable transact
Calculate the appropriate valuation metrics and using the mean of those metrics, and estimate the p
Industries should pay for the Duo System using DFC, comparable company and comparable transact
FY 04
14,000
8,500
5,500
1,800
570
3,130
550
2,580
1,149
1,431
FY 05
16,500
9,500
7,000
2,000
610
4,390
500
3,890
1,257
2,633
493
25
1,417
537
27
1,544
Wire Dynamics
110.00
3.70
35.60
109.15
Assumptions
Constant growth rate
WACC
Number of shares (in "000")
Tax Rate
All no. are in $ 000 mentioned unless otherwise
Free Cash Flow
Net Income
Add: Interest *(1-tax)
Add: Depreciation
Add: Change in deferred Taxes
Less: Change in Working capital
Less: Capital Expenditures
Free Cash Flow
Terminal Value
Total Free Cash Flow
Pv of Free Cash Flow
Target Value
7%
9.5%
1000
30%
43
FY 01
FY 02
FY 03
FY 04
FY 05
1,195
490
450
17
(384)
(1,104)
664
1,032
462
490
19
(415)
(1,192)
396
1,129
420
530
22
(452)
(1,300)
349
1,431
385
570
25
(493)
(1,417)
501
664
396
349
501
2,633
350
610
27
(537)
(1,544)
1,539
65,869
67,408
606
330
266
348
42,820
2
10
30
40
32
31
34
Takeover Premium
Target Company Statistics
Stock price pre-takeover ($)
Acquisition stock price ($)
Takeover premium
Mean Takeover premium
Acquisition Price
23%
42
Mouse
Corporation
Pad Inc.
Wire Dynamics
Mean Ratio
20
3
1
18
3
1
30
3
1
22
3
1
Page Corporation
18
22
20%
Cover Industries
27
34
25%
Wrap Corp
43
53
24%
Comparable Transaction
2
10
30
37
36
38
37
Page Corporation
19.82
3.49
1.25
Cover Industries
19.88
3.33
1.25
Wrap Corp
21.26
3.80
1.33
Mean Ratio
20.32
3.54
1.27