Extra Credit Pro Forma Assignment
Due the last day of class.
Currently the two firms (Roanoke Rafts and Waynesboro Wheels) are each growing at 5% per year. The two firms are considering merging. The combined firm is expected to grow at 10% for 4 years and then 6% from then on.
The merger would result in a 10% reduction in personnel and after a first year charge of an additional 20% of labor (not of sales), payroll will be 8% lower (again not of sales).
Other expenses will also benefit from some synergies with the total only 150% of the combined firms in the first year.
Utilities are expected to grow at 5% regardless of the merger. Assume the tax rate is 25%.
Assume the correct discount rate is 16%. What is the value of each firm using the Discounted Cash Flow approach? What is the combined value? Should the firms do the merger? Why or why not?
|
Income Statement |
Income Statement |
|
|
Roanoke Rafts |
Waynesboro Wheels |
|
|
Sales |
1,100,000 |
1,000,000 |
|
COGS |
600,000 |
525,000 |
|
Gross Margin |
500,000 |
475,000 |
|
Labor |
255,000 |
225,000 |
|
Utilities |
47,000 |
40,000 |
|
Depreciation |
60,000 |
56,000 |
|
Other |
35,000 |
45,000 |
|
Net Income |
103,000 |
109,000 |
|
Assets |
Assets |
|
|
Roanoke Rafts |
Waynesboro Wheels |
|
|
Cash |
80,000 |
70,000 |
|
A/R |
300,000 |
270,000 |
|
Inventory |
320,000 |
310,000 |
|
Current Assets |
700,000 |
650,000 |
|
Plant + Equip. |
600,000 |
560,000 |
|
Total Assets |
1,300,000 |
1,210,000 |
|
Debt + Equity |
Debt + Equity |
|
|
Roanoke Rafts |
Waynesboro Wheels |
|
|
Current Liab. |
180,000 |
52,000 |
|
LT Liab. |
600,000 |
190,000 |
|
Total Liab. |
780,000 |
242,000 |
|
Equity |
520,000 |
968,000 |
|
Total D+E |
1,300,00 |
1,210,000 |