Prepare a report that justifies the merger for the executive leadership team of Admiral

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Prepare a report that justifies the merger for the executive leadership team of Admiral. Complete the calculations and provide tables in your report that illustrate the components of each calculation.

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In your final project,

  • Explain the two valuation methods (DCF and comparative multiples) that would be used to value Favorite’s stock if it was a private company, including the benefits and drawbacks of each method.
  • Calculate the pre-merger earnings per share for Admiral and Favorite and the pre-merger price-to-earnings (P/E) ratio for each company (based on the stated prices per share).
    • Use a table to illustrate your calculations and conclusion.
  • Calculate the exchange ratio of Admiral shares for each share of Favorite, based on the stated price per share of each company.
    • Use a table to illustrate your calculations and conclusion.
  • Calculate three additional exchange ratios of Admiral shares for each share of Favorite.
    • Assume a 15%, 20%, and 25% premium price per share over the stated Favorite price of $15 per share.
    • Use a table to illustrate your calculations and conclusion.
  • Calculate the Admiral Foods post-merger income statement and earnings per share, assuming an exchange ratio of 0.45.
    • Use a table to illustrate your calculations and conclusion.
  • Explain the other considerations (non-financial) the executive leadership team should consider prior to completing the merger.
  • Explain the merits of completing this merger as a stock exchange rather than a cash purchase, including the tax implications to Favorite shareholders and the impact on Admiral’s capital structure.
    • Assume that Admiral’s overall debt level would increase as a result of a cash purchase.
  • The VP of operations insists that the merger will generate $1.0 million in after tax earnings each year from synergies, due to Favorite using Admiral products in its cost of goods sold.
    • Calculate the free cash flow from the synergies for 5 years, assuming $100,000 of depreciation for each year.
    • Use a table to illustrate your calculations and conclusion.
    • Calculate Admiral’s required rate of return on equity using the CAPM.
      • Use Admiral’s beta of 1.3, a risk-free rate of 2.0%, and a market risk premium of 7.0%.
      • Use a table to illustrate your calculations and conclusion.
    • Calculate Admiral’s weighted average cost of capital (WACC).
      • Assume Admiral’s cost of debt is 4% (pretax).
      • Use Admiral’s market value of equity and book value of debt as its capital structure for the WACC calculation.
      • Use a table to illustrate your calculations and conclusion.
    • Develop the terminal year value of the synergies based on the fifth year of the cash flows.
      • Assume the growth rate of the synergistic cash flows after the terminal year is 1.0%.
    • Determine the net present value of the cash flows resulting from synergies.
      • Assume that the earnings due to synergies end after 5 years.
      • Use a table to illustrate your calculations and conclusion.
    • Determine the EPS of the combined company in Year 1 if these synergies occur.
      • Use the Admiral Foods post-merger income statement you calculated for this final project and the shares outstanding you calculated using an exchange ratio of 0.45.
      • Include the net earnings after-tax from the synergies to determine the total, combined net earnings after-tax.
      • Use the total, combined net earnings after-tax to compute the EPS.
      • Use a table to illustrate your calculations and conclusion.
    • Explain the evidence on the average premiums paid in acquisitions.
    • Propose your recommended price for Favorite shares and the exchange ratio for the merger based on this price.
      • Note that Mr. Favorite will not agree to the merger without some premium over the stated $15 price per share.
      • Your recommended price should be within the range of prices you determined based on the range of premiums of 15%, 20%, or 25%.
    • Justify your recommendation.
      • Consider whether your proposed price is similar to the evidence you found on average control premiums.
      • Consider whether your proposed price is good for both companies.

The Merger Financial Analysis final project

Requirements: 5-6 pages

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