Blackrock Investments is looking to buy Textile Industries, with the actual purchase occurring on December 31, 2011. Blackrock has created forecasted balance sheets and income statements for Textile Industries following the acquisition which reflect how Blackrock will run the firm (see attached pages… Excel spreadsheets are on the course website).
Textile Industries currently has a capital structure of $2 million in debt and $6 million in equity (both are market values). Their current equity beta is 1.60. The market risk premium is 6.3%. The yield on 30- year Treasury bonds is 3.00%. The marginal corporate tax rate is 37%.
Blackrock expects that, after 2016, Textile’s FCFs will grow with inflation (which is expected to be 2% per year). Blackrock will purchase Textile Industries by borrowing much of the purchase price today and then paying down the debt over time. The cost of the debt to be used to finance the purchase of Textile (both long-term debt and the revolving credit line) has a yield of 10%. After 2016, they will have paid down the debt to a permanent level, expecting that the tax savings from the interest expense will stay constant into perpetuity. There are no net operating loss (NOL) carryforwards at Textile Industries.
1Using the APV method, calculate the firm value of Textile Industries to Blackrock. Be sure to include a spreadsheet that clearly shows your work and calculations. (This means that the TA should be easily able to see how you arrived at your solution. You do not need to show the equations in your spreadsheet.)
2You have the following information about some of Textile Industries closest competitors. Use the price multiples valuation method to get 2 more estimates of the value of Textile Industries.
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Yoya Supplies, Inc.
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Mye Company
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BabyTea Industries
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Price/Earnings ratio (on next year’s expected earnings)
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14.7
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13.1
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17.8
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Market value of assets/Book value of assets ratio
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3.5
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2.1
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3.9
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Forecasted Balance Sheets for Textile Industries numbers in thousands
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Dec. 31, 2011
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2012
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2013
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2014
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2015
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2016
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Cash
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$75
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$75
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$75
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$75
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$75
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$75
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Accounts Receivable
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0
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556
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629
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702
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745
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802
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Inventory
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3,294
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3,692
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4,114
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4,367
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4,678
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4,867
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Organization Costs-Current
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90
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90
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90
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90
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90
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0
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Total Current Assets
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3,459
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4,413
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4,908
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5,234
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5,588
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5,744
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Land
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1,686
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1,686
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1,686
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1,686
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1,686
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1,686
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Plant and Equipment
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873
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1,248
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1,623
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1,998
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2,373
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2,748
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Gross PP&E
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2,559
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2,934
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3,309
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3,684
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4,059
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4,434
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Accum. Depreciation
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0
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175
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424
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749
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1,148
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1,623
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Net PP&E
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2,559
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2,759
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2,885
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2,935
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2,911
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2,811
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Organization Costs-Noncurrent
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360
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270
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180
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90
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0
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0
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Total Assets
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$6,378
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$7,442
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$7,973
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$8,259
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$8,499
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$8,555
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Payables & Accruals
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$195
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$372
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$416
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$440
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$471
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$489
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Debt-Current Portion LTD
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600
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600
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600
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600
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600
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0
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Revolving Line of Credit
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1,683
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2,583
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2,938
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2,908
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2,709
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2,168
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Total Current Liabs.
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2,478
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3,555
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3,954
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3,948
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3,780
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2,657
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Debt, non-current
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2,400
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1,800
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1,200
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600
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0
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0
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Total Liabilities
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4,878
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5,355
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5,154
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4,548
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3,780
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2,657
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Common Stock
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1,500
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1,500
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1,500
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1,500
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1,500
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1,500
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Retained Earnings
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0
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587
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1,319
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2,211
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3,219
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4,398
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Total Equity
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1,500
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2,087
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2,819
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3,711
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4,719
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5,898
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Total Liabilities & Equity
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$6,378
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$7,442
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$7,973
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$8,259
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$8,499
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$8,555
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Attachment:- assignment 3 exhibits.rar