Calculating Post-money Valuation and Implied Share Price Exercise Solutions

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What is the marginal federal, state, and local tax rate?

30%

40% (correct)

45%

35%

What is the beta for publicly traded firms in the restaurant industry?

2.5

2 (correct)

3

1.5

What is the business's target debt-to-equity ratio?

1 (correct)

2

1.5

0.5

What is the liquidity-risk premium for the restaurant business?

15% Signup and view all the answers

What is the investor's willingness to pay a premium to reflect the value of control?

10% Signup and view all the answers

What is the pre-money valuation of the company after the share capital increase?

$1,500,000 Signup and view all the answers

How many new shares did the investment fund purchase?

2,000 Signup and view all the answers

What is the implied share price after the share capital increase?

$150 Signup and view all the answers

If the company is sold for $6,000,000 after 4 years, how much will the investment fund receive?

$1,800,000 Signup and view all the answers

What is the Internal Rate of Return (IRR) of the investment fund's investment, assuming a $6,000,000 sale after 4 years?

45% Signup and view all the answers

What does the acronym FCFF stand for?

Free cash flow to the firm Signup and view all the answers

How is the maximum purchase price (PVMAX) calculated?

PVMAX = (PVMIN + PVNS)(1 + CP%)(1 - LD%) Signup and view all the answers

If LGI wants to acquire a controlling interest in Acuity Lighting, what is the estimated standalone equity value of Acuity?

$18,699,493 Signup and view all the answers

What is the present value of synergies that LGI believes can be achieved by acquiring Acuity Lighting?

$2,250,000 Signup and view all the answers

What is the maximum control premium that LGI is willing to pay to acquire a controlling interest in Acuity Lighting?

10% Signup and view all the answers

How does LGI adjust the liquidity discount for Acuity Lighting?

LGI reduces the median 20% liquidity discount by 4% to reflect Acuity's high financial returns and cash flow growth rate. Signup and view all the answers

What is the key characteristic of privately held U.S. firms?

Their shares are heavily concentrated among a few owners Signup and view all the answers

What percentage of firms with employees in the U.S. have 99 or fewer employees?

98% Signup and view all the answers

Which of the following is a challenge in analyzing and valuing privately held firms?

Lack of external audits Signup and view all the answers

How may privately held firms manipulate their reported income?

By understating revenue and overstating expenses Signup and view all the answers

What is the first step involved in valuing a privately held business?

Adjust the target firm data to reflect true current profitability and cash flow Signup and view all the answers

What is the primary reason for the high concentration of mergers and acquisitions (M&A) among smaller, family-owned firms in the U.S.?

The M&A market in the U.S. is concentrated among smaller, family-owned firms Signup and view all the answers

What is the goal of an event study?

To measure the effect of an economic event on firm value Signup and view all the answers

How is the abnormal return calculated in an event study?

Abnormal return = Event-driven return - Normal return Signup and view all the answers

What is the normal return generating process used in the Danone and WhiteWave Foods acquisition case study?

Market Model Signup and view all the answers

What is the length of the event window used in the Danone and WhiteWave Foods acquisition case study?

11 days centered on the announcement date Signup and view all the answers

What is the cumulated abnormal return (CAR) used to measure in an event study?

The sum of abnormal returns over the event window Signup and view all the answers

In the Total SA and Saft merger case study, what is the market value of Total SA on April 9th, 2016?

$98.626 billion Signup and view all the answers

What is the total value received by the manager based on the information provided?

$330,400 Signup and view all the answers

How is the value received by the Investment Fund calculated in the text?

$1,269,600 Signup and view all the answers

In which year did the Investment Fund's IRR reach $1,152,000 according to the text?

2016 Signup and view all the answers

What was the Convertible Bonds value in 2012 according to the provided data?

$5,000 Signup and view all the answers

What is the 20% compensation based on for the Investment Fund?

Shares in Equity2016 Signup and view all the answers

What does the text suggest about valuing privately owned companies as compared to publicly traded firms?

Valuing privately owned companies is more complex than publicly traded firms. Signup and view all the answers

Why is it often more challenging to determine the value of privately owned companies compared to publicly traded firms?

Privately owned companies lack a liquid market for their shares, making valuation more difficult. Signup and view all the answers

Why is it important for an acquirer to restate financial statements provided by the target firm?

To ensure comparability and accuracy of financial information for valuation purposes. Signup and view all the answers

How can an analyst determine if a target firm's costs and revenues are understated or overstated?

By comparing the target firm's financial ratios with industry benchmarks. Signup and view all the answers

What is a common valuation approach used for small, privately owned firms due to data limitations?

The Capitalization (Multiples) Method. Signup and view all the answers

Why might an acquirer prefer using the Discounted Cash Flow (DCF) approach over the Relative or market-based approach for valuing a target firm?

DCF approach accounts for the target firm's specific risk and cash flow projections. Signup and view all the answers

What makes analyzing and valuing a privately held firm different from analyzing and valuing a publicly traded firm?

Privately held firms have limited market data available compared to publicly traded firms. Signup and view all the answers

What is a common challenge when valuing privately held firms?

Lack of externally generated information Signup and view all the answers

What is a common form of manipulating reported income in privately held firms?

Understating revenue and overstating expenses Signup and view all the answers

What is the first step in valuing a privately held business?

Adjust target firm data to reflect true profitability Signup and view all the answers

Which valuation approach is commonly used for privately held firms?

All of the above Signup and view all the answers

What is a key difference between valuing publicly traded and privately held firms?

Publicly traded firms have more externally generated information Signup and view all the answers

What is a common issue when restating financial statements for an acquirer?

Lack of adequate documentation of key intangible assets Signup and view all the answers

What is the key reason for the improvement in profit margin after the merger between Firm A and Firm B?

The combined firm can achieve economies of scale by spreading fixed costs over a larger volume of output. Signup and view all the answers

What is the primary motivation behind the merger between Firm A and Firm B based on the information provided?

Achieving operating synergies through economies of scale. Signup and view all the answers

What is the key benefit of the data processing center consolidation after the merger between Firm A and Firm B?

Reduced direct labor costs in the combined data processing operations. Signup and view all the answers

What is the primary reason for the high concentration of mergers and acquisitions (M&A) among smaller, family-owned firms in the U.S. according to the text?

The text does not provide any information about the reasons for the high concentration of M&A among smaller, family-owned firms. Signup and view all the answers

Which of the following is a common challenge in analyzing and valuing privately held firms compared to publicly traded firms?

All of the above are common challenges in valuing privately held firms. Signup and view all the answers

What is a common form of manipulating reported income in privately held firms according to the text?

The text does not mention any common forms of income manipulation in privately held firms. Signup and view all the answers

What is the primary purpose of event studies in finance and accounting?

To measure the impact of corporate events on stock prices Signup and view all the answers

Which type of market efficiency is associated with security prices reflecting all publicly available information?

Semi-strong form efficiency Signup and view all the answers

What is a common challenge in analyzing and valuing privately held firms compared to publicly traded firms?

All of the above Signup and view all the answers

Which of the following is a common application of event studies in the field of law and economics?

Both a and b Signup and view all the answers

What is the key characteristic of privately held U.S. firms mentioned in the text?

They have a higher percentage of family-owned businesses Signup and view all the answers

What is the primary reason an acquirer might prefer using the Discounted Cash Flow (DCF) approach over the Relative or market-based approach for valuing a target firm?

The DCF approach provides a more accurate valuation Signup and view all the answers

What is the purpose of Exercise 1 in the tutorial session?

To demonstrate the distribution of equity within a family-owned company. Signup and view all the answers

What aspect of corporate restructuring is emphasized in Session 2 of the tutorial?

Sharing of value. Signup and view all the answers

In the provided scenario, what is the significance of the PE fund's negotiation with the family owning DUPLAT?

To secure external equity financing for significant development projects. Signup and view all the answers

What does the distribution of shares among the family members of DUPLAT illustrate?

The distribution of power within a family-owned company. Signup and view all the answers

What is a key theme discussed in Session 3 of the tutorial on M&As and Corporate Restructuring?

Measuring shareholders' wealth creation. Signup and view all the answers

Based on the scenario, what would be a likely next step following the negotiation between the DUPLAT family and the PE fund?

Finalizing agreements for external equity financing for development projects. Signup and view all the answers

Which of the following is NOT a motivation for mergers and acquisitions (M&A) mentioned in the text?

Market saturation Signup and view all the answers

What is the term used in the text to describe the phenomenon where the acquirer overpays due to overconfidence?

Hubris Signup and view all the answers

What is a key difference between valuing publicly traded and privately held firms?

Availability of financial data Signup and view all the answers

What is the term used in the text to describe the excess returns earned by acquirer and target shareholders due to a takeover?

Abnormal returns Signup and view all the answers

What is the purpose of an event study mentioned in the text?

To measure the impact of an event on firm value Signup and view all the answers

What is the maximum purchase price the investor should be willing to pay for a 50.1% stake in the target firm?

$468,936 Signup and view all the answers

What is the expected annual growth rate of the restaurant's operating income according to the text?

4% Signup and view all the answers

What is the purpose of the liquidity discount mentioned in the text?

To account for the lack of marketability of the target firm's shares Signup and view all the answers

What is the primary reason for the high concentration of mergers and acquisitions (M&A) among smaller, family-owned firms in the U.S.?

Smaller, family-owned firms are more likely to be sold due to succession planning issues Signup and view all the answers

Which valuation approach is commonly used for privately held firms according to the text?

Discounted Cash Flow (DCF) Signup and view all the answers

What is the key characteristic of privately held U.S. firms mentioned in the text?

They have 99 or fewer employees Signup and view all the answers

Calculating Post-money Valuation and Implied Share Price Exercise Solutions

Podcast Beta

Questions and Answers

What is the marginal federal, state, and local tax rate?

What is the beta for publicly traded firms in the restaurant industry?

What is the business's target debt-to-equity ratio?

What is the liquidity-risk premium for the restaurant business?

What is the investor's willingness to pay a premium to reflect the value of control?

What is the pre-money valuation of the company after the share capital increase?

How many new shares did the investment fund purchase?

What is the implied share price after the share capital increase?

If the company is sold for $6,000,000 after 4 years, how much will the investment fund receive?

What is the Internal Rate of Return (IRR) of the investment fund's investment, assuming a $6,000,000 sale after 4 years?

What does the acronym FCFF stand for?

How is the maximum purchase price (PVMAX) calculated?

If LGI wants to acquire a controlling interest in Acuity Lighting, what is the estimated standalone equity value of Acuity?

What is the present value of synergies that LGI believes can be achieved by acquiring Acuity Lighting?

What is the maximum control premium that LGI is willing to pay to acquire a controlling interest in Acuity Lighting?

How does LGI adjust the liquidity discount for Acuity Lighting?

What is the key characteristic of privately held U.S. firms?

What percentage of firms with employees in the U.S. have 99 or fewer employees?

Which of the following is a challenge in analyzing and valuing privately held firms?

How may privately held firms manipulate their reported income?

What is the first step involved in valuing a privately held business?

What is the primary reason for the high concentration of mergers and acquisitions (M&A) among smaller, family-owned firms in the U.S.?

What is the goal of an event study?

How is the abnormal return calculated in an event study?

What is the normal return generating process used in the Danone and WhiteWave Foods acquisition case study?

What is the length of the event window used in the Danone and WhiteWave Foods acquisition case study?

What is the cumulated abnormal return (CAR) used to measure in an event study?

In the Total SA and Saft merger case study, what is the market value of Total SA on April 9th, 2016?

What is the total value received by the manager based on the information provided?

How is the value received by the Investment Fund calculated in the text?

In which year did the Investment Fund's IRR reach $1,152,000 according to the text?

What was the Convertible Bonds value in 2012 according to the provided data?

What is the 20% compensation based on for the Investment Fund?

What does the text suggest about valuing privately owned companies as compared to publicly traded firms?

Why is it often more challenging to determine the value of privately owned companies compared to publicly traded firms?

Why is it important for an acquirer to restate financial statements provided by the target firm?

How can an analyst determine if a target firm's costs and revenues are understated or overstated?

What is a common valuation approach used for small, privately owned firms due to data limitations?

Why might an acquirer prefer using the Discounted Cash Flow (DCF) approach over the Relative or market-based approach for valuing a target firm?

What makes analyzing and valuing a privately held firm different from analyzing and valuing a publicly traded firm?

What is a common challenge when valuing privately held firms?

What is a common form of manipulating reported income in privately held firms?

What is the first step in valuing a privately held business?

Which valuation approach is commonly used for privately held firms?

What is a key difference between valuing publicly traded and privately held firms?

What is a common issue when restating financial statements for an acquirer?

What is the key reason for the improvement in profit margin after the merger between Firm A and Firm B?

What is the primary motivation behind the merger between Firm A and Firm B based on the information provided?

What is the key benefit of the data processing center consolidation after the merger between Firm A and Firm B?

What is the primary reason for the high concentration of mergers and acquisitions (M&A) among smaller, family-owned firms in the U.S. according to the text?

Which of the following is a common challenge in analyzing and valuing privately held firms compared to publicly traded firms?

What is a common form of manipulating reported income in privately held firms according to the text?

What is the primary purpose of event studies in finance and accounting?

Which type of market efficiency is associated with security prices reflecting all publicly available information?

What is a common challenge in analyzing and valuing privately held firms compared to publicly traded firms?

Which of the following is a common application of event studies in the field of law and economics?

What is the key characteristic of privately held U.S. firms mentioned in the text?

What is the primary reason an acquirer might prefer using the Discounted Cash Flow (DCF) approach over the Relative or market-based approach for valuing a target firm?

What is the purpose of Exercise 1 in the tutorial session?

What aspect of corporate restructuring is emphasized in Session 2 of the tutorial?

In the provided scenario, what is the significance of the PE fund's negotiation with the family owning DUPLAT?

What does the distribution of shares among the family members of DUPLAT illustrate?

What is a key theme discussed in Session 3 of the tutorial on M&As and Corporate Restructuring?

Based on the scenario, what would be a likely next step following the negotiation between the DUPLAT family and the PE fund?

Which of the following is NOT a motivation for mergers and acquisitions (M&A) mentioned in the text?

What is the term used in the text to describe the phenomenon where the acquirer overpays due to overconfidence?

What is a key difference between valuing publicly traded and privately held firms?

What is the term used in the text to describe the excess returns earned by acquirer and target shareholders due to a takeover?

What is the purpose of an event study mentioned in the text?

What is the maximum purchase price the investor should be willing to pay for a 50.1% stake in the target firm?

What is the expected annual growth rate of the restaurant's operating income according to the text?

What is the purpose of the liquidity discount mentioned in the text?

What is the primary reason for the high concentration of mergers and acquisitions (M&A) among smaller, family-owned firms in the U.S.?

Which valuation approach is commonly used for privately held firms according to the text?

What is the key characteristic of privately held U.S. firms mentioned in the text?

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