(answered) – 1 Question….the problem is long but hopefully you can help meDescriptionSolution downloadThe Question1 Question….the problem is long but hopefully you can help me out, extra tip will be includedProblem:Setting ? It is early January 2010, and as the chief financial officer of TM Toys Inc.,you are evaluating a strategic acquisition of Toy Co. Inc. (the ?target?).Industry Overview-The toys-and-games industry consists of a select group ofglobal players. The $60 billion industry (excluding videos) is dominated by two U.S.toy makers: Mattel (Barbie, Hot Wheels, Fisher-Price) and Hasbro (G.I. Joe, Tonka,Playskool). International players include Japan?s Bandai (Digimon) and Sanrio (HelloKitty), as well as Denmark?s LEGO Holding. Success in this industry is dependent oncreating cross-culturally appealing brands backed by successful marketingstrategies. Toy companies achieve success through scoring the next big hit with theirtarget consumers and unveiling the ?must-have? toys. Historically, we have seensignificant merger and acquisition activity and consolidation among brands in thisindustry.Target Company Description-Toy Co. Inc. is a multibrand company that designsand markets a broad range of toys and consumer products. The product categoriesinclude: Action Figures, Art Activity Kits, Stationery, Writing Instruments,Performance Kites, Water Toys, Sports Activity Toys, Vehicles, Infant/Preschool,Plush, Construction Toys, Electronics, Dolls, Dress-Up, Role Play, and Pet Toys andAccessories. The products are sold under various brand names. The target designs,manufactures, and markets a variety of toy products worldwide through sales toretailers and wholesalers and directly to consumers. Its stock price closed on12/31/2009 at $19.49 per share.Valuation Assignment- Your task is to estimate the intrinsic value of Toy Co. Inc.?sequity (on a per share basis) on 12/31/09 using the enterprise DCF model; this willassist you with determining what per share offer to make to Toy Co. Inc.?sshareholders. Treat all of the results/forecasts for the fiscal year ended 2010-2014as projections. Your research on various historical merger and acquisitiontransactions suggests that comparable toy companies have been acquired atEnterprise Value/ EBITDA multiples of 10.5X ? 11.5X. This is your assumption for aterminal ? value exit multiple at the end of the forecast period, 2014. Exhibit 1includes the target?s planning period cash flow estimates, and Exhibit 2 providesmarket and other data for calculation of a weighted average cost of capital (WACC)for a discount rate.Exhibits 1 & 2 are on next pageExhibit 1: Planning Period Cash Flow EstimatesToy Co. Inc. ($ in Millions)Projected Firm Free Cash FlowsFiscal Year Ended12/31/1012/31/11 12/31/12Net Operating$733.16$757.63$783.64IncomeLess: Taxes201.27207.98235.09NOPAT$531.90$549.65$548.55Plus: Depreciation183.58186.21191.80Less: Capital(180.00)(212.82)(219.20)Expenditures(Increase) in(50.37)43.54(27.68)Working CapitalEquals FCFF$485.11$566.59$493.47EBITDA$916.74$943.84$975.4512/31/13$799.3212/31/14$815.30239.80$559.52195.64(223.59)244.59$570.71199.55(228.06)(19.82)(20.21)$511.76$994.95$521.99$1,014.85Exhibit 2: Estimate a ?Risk-Appropriate? Discount RateCost of debt ? Estimated borrowing rate is 6.125% with a marginal tax of27.29%, resulting in an after-tax cost of debt of 4.5%.Cost of equity ? Levered equity beta for Toy Co. is .777; using the capital assetpricing model with a 10-year Treasury bond yield of 4.66% and a market riskpremium of 7.67% produces an estimate of the levered cost of equ
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