+61480015851
Roy Henry, President of IBEX Solutions has His Eye on an Acquisition Target - Accounting Assignment Help
Download Solution
Order New Solution
Assignment Task:
Task:
| IBEX-Acme deal - case | |||||||||||||
| Roy Henry, President of IBEX Solutions has his eye on an acquisition target, Acme Filters, a division of SL Filters Corporation. Acme is a mature business that has underperformed in its industry for the past six years. After an internal campaign to boost performance fell short of senior executives’ expectations, SL Corporation resolved to sell. Working with the division managers from IBEX industries who knows Acme’s operations and with some external professionals, Henry has targeted the following specific opportunities for value creation. | |||||||||||||
| Acme’s product line will be rationalized and some components will be outsourced to improve the company’s operating margin by three percentage points. | |||||||||||||
| The same changes will reduce the inventory and boost payables, producing one time reduction in net working capital. | |||||||||||||
| Some of Acme’s non productive assets will be sold. | |||||||||||||
| Distribution will be streamlined and new sales incentives introduced to raise the company’s growth from 2% to 3% annually to industry average of 5% | |||||||||||||
| Some taxes will be saved mostly through the interest tax shield associated with borrowings. | |||||||||||||
| The seller’s representatives have indicated that SL Corporation is reluctant to accept an offer less than the book value (currently at $307 million) for Acme despite the division’s recent poor performance. Henry’s financial experts believe that a deal at book value could be financed at 80% debt, comprising of senior bank debt, privately placed subordinated debt and revolving credit facility. Henry expects to pay down the debt as quickly as possible and arrive at a debt to capital ratio of no higher than 50% within five years. | |||||||||||||
| Acme does not have publicly traded shares but a few similar companies do and they provide benchmark for estimating the cost of equity. One such company with a historical debt ratio of 45% to 50% has an estimated cost of equity of 24%. Another with no debt in its capital structure has an estimated cost of equity of 13.5%. In general, Henry’s equity investors expect a significantly higher return of 30% to 35%. Also for comparison let us supposed that the return on long term Government bonds is 5%. | |||||||||||||
| Also let us suppose that we expect the cash flow for years six and after to grow at 5% till perpetuity. At the end of year five, Henry proposes to refinance the company’s debt with a new $140million long term debentures at 9%. In the subsequent years, the indebtedness grows as the company grows say at 5%. So too does the tax shield grow. | |||||||||||||
| Question for discussion | |||||||||||||
| Should Henry go for the deal at $307 million? Compare and contrast your answer using the Adjusted Present Value (APV) approach and the free cash flow (WACC) approach. | |||||||||||||
The above Accounting Assignment has been solved by our Accounting Assignment Experts at onlineassignmentbank. Our Assignment Writing Experts are efficient to provide a fresh solution to this question. We are serving more than 10000+ Students in Australia, UK & US by helping them to score HD in their academics. Our experts are well trained to follow all marking rubrics & referencing style.
Be it a used or new solution, the quality of the work submitted by our assignment experts remains unhampered. You may continue to expect the same or even better quality with the used and new assignment solution files respectively. There’s one thing to be noticed that you could choose one between the two and acquire considered worthy of the highest distinction.