Question

Here you have a list of suggested steps: Put together the Income Statement for the next 5 years. 1- Calculate the Operating Cash Flow for the next 5 years. 2- 3- Calculate the Cash Flow from Assets or Free Cash Flow for the next 5 years Calculate the cost of equity for CCC. 4- 5- Calculate CCC's WACC, in this case is going to be equal to the cost of equity since CCC does not have any debt 6- Calculate CCC's Terminal Value in Year 5 7- Find the tentative value of CC discounting all the Free Cash Flow for the next 5 years and the Terminal Value in year 5 8- Calculate CCC's price per share 9- Calculate Pampa's post-merger price per share.* 10- Calculate Pampa's post-merger beta.** *The key concept is that, barring other market frictions, firm value will increase by the NPV of the project. If a firm pays $100 cash for something that is worth $120, they exchange $100 in assets (cash) for $120 in assets (value of new project), so market value increases by $20. Of course, this assumes no information problems, i.e., investors and managers see the same valuation and probability 1 that the deal will be completed. ** If the equity of the newly acquired firm is worth $120 and the old firm is worth say $250, then the equity value of the combined firm will be $120 $250, and it is straightforward to compute the equity weights for estimating the beta of the combined firm

Answer 1

	0	1	2	3	4	5
Free Cash Flow Estimate for CCC
Sales revenue [as given]		$        3,00,000	$     3,35,000	$       3,75,000	$     4,10,000	$      5,75,000
Less: COGS [38% of sales revenue]		$        1,14,000	$     1,27,300	$       1,42,500	$     1,55,800	$      2,18,500
Less: SG&A [12% of sales revenue]		$           36,000	$         40,200	$           45,000	$         49,200	$          69,000
Less: Depreciation [as given]		$           15,000	$         30,000	$           40,000	$         52,000	$          60,000
Equals: EBIT		$        1,35,000	$     1,37,500	$       1,47,500	$     1,53,000	$      2,27,500
Less: Taxes [40% of EBIT]		$           54,000	$         55,000	$           59,000	$         61,200	$          91,000
Equals: EBIAT		$           81,000	$         82,500	$           88,500	$         91,800	$      1,36,500
Add: Depreciation		$           15,000	$         30,000	$           40,000	$         52,000	$          60,000
Equals: OCF		$           96,000	$     1,12,500	$       1,28,500	$     1,43,800	$      1,96,500
Less: Investment in Capex and NWC [as given]		$           18,000	$         25,000	$           40,000	$         50,000	$          65,000
Equals: Free Cash Flow [OCF-Investment in Capex/nwc]		$        1,14,000	$     1,37,500	$       1,68,500	$     1,93,800	$      2,61,500
Cost of capital estimate for CCC
E(Rm)-Rf = 7.5%-2.5% =	5.00%
CCC Cost of Capital = 2.5%+1.353*5.00%=	9.265%
Valuation of CCC
Yearly free cash flows [OCF-Investment in capex/nwc]		$        1,14,000	$     1,37,500	$       1,68,500	$     1,93,800	$      2,61,500
+Terminal value in year 5 [261500*1.015/0.09265-0.015]						$    28,64,787
=Total cash flows		$        1,14,000	$     1,37,500	$       1,68,500	$     1,93,800	$    31,26,287
PVIF at 9.265% [PVIF = 1/1.09265^t]		0.91521	0.83760	0.76658	0.70158	0.64209
		[1/1.09265]	[1/1.09265^2]	[1/1.09265^3]	[1/1.09265^4]	[1/1.09265^5]
PV of FCF		$        1,04,334	$     1,15,170	$       1,29,169	$     1,35,966	$    20,07,352
Value of CCC [Sum of PV of FCF of years 1 to 5]	$        24,91,990
Number of shares outstanding	100000
Price per share [2491990/100000]	$                24.92