TREVECCA NAZARENE UNIVERSITY ONLINE MBA FINANCE
- Describe the pros and cons of Roy Tyson expanding via the acquisition of another building maintenance and cleaning company in Lynchburg, a city 55 miles from Danville. Are there any elements of the projected cash flows for PBM or Fabricare that trouble you?
- In the valuation of Fabricare, Roy is trying to decide the price he is willing to pay for the firm. In a proper valuation of Fabricare, what role (i.e., how should each method be used, if at all, by Roy) should each of the following play in the analysis? Explain. (a) the liquidation value (b) the book value of the assets to be acquired from Fabricare; (c) price-to-earnings ratio for publicly-traded maintenance firms; (d) market value as a percentage of sales analysis for publicly-traded firms; and
(e) an estimate of the value of Fabricare under current management. In addition to explaining the roles, if any, for each option, be sure to provide the dollar value under each option, and explain how you determined each number. Note: The value of Fabricare under current management can be estimated using the formula for the present value of a growing perpetuity (see Chapter 6), also known as the constant growth model. Also note that the “C” in the growing perpetuity model must be the next cash flow. Hint: Don’t assume that all five of the methods would play useful roles. Hint for c, d, and e: The purchase of Fabricare is to be for 1993, not 1991 or 1992, so you might need to adjust some inputs to put them in 1993. Hint for c and d: You are being asked to calculate the value under two different multiples/comparables methods using industry multiples provided in the case. And then you need to consider how reliable these would be as estimates of the value of Fabricare. You are not being asked to evaluate the concepts of percentage of sales or PE ratios, except in the context of the usefulness of using them to estimate the value of Fabricare.
- Assuming that the Fabricare acquisition is undertaken and Roy permits Stuart to purchase an interest in the combined firm, discuss possible financing alternatives for both transactions. Do you think that Stuart will have trouble obtaining bank financing for any amount in excess
of the $110,000 of cash that he currently has available? Why or why not? If you were Stuart, would you be willing to pay a full 45% of the value of the firm for 45% of the ownership in the firm? Why or why not?
- If Roy Tyson were to acquire Fabricare, what is the maximum amount that he should pay for the firm, assuming that the acquisition is effective at the beginning of 1993? Note: Use the best valuation method. In addition to showing your work on an Excel sheet, you must explain your answer and how you determined it.
NOTE: You must submit an Excel spreadsheet in STEP TWO on Blackboard in order to show any calculations.
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