Respond to the prompt below in a 4 to 6 page APA formatted Word Document
(page count excludes tables, graphs, appendices, title, and reference pages).
Your answers should be clear, well-organized, and specific. Provide a concise,
cogent argument and include details to support your response.
Q1:What is a systematic liquidation of a venture?
A systematic liquidation of a venture is the process of winding down a
business and selling off its assets in an orderly and systematic manner. This is
typically done when a company is no longer able to continue operating, either
because it has gone bankrupt or because its owners have decided to close it
down. The goal of a systematic liquidation is to maximize the value of the
company's assets and to distribute the proceeds from their sale to the
company's creditors and shareholders.
What are some of the advantages and disadvantages of a systematic
liquidation?
The main advantage of a systematic liquidation is that it allows a company to
sell off its assets in an organized and efficient manner, which can help to
maximize the value that is recovered from the sale. This can be particularly
beneficial for companies that have a large number of assets, such as real
estate or equipment, as it can help to ensure that all of these assets are sold
for the best possible price.
One potential disadvantage of a systematic liquidation is that it can be a time-
consuming and complex process. In order to maximize the value of the
company's assets, the liquidation process may involve hiring specialized
consultants or other professionals to help manage the sale of the assets. This
can add to the cost of the liquidation and may make it more expensive than
simply selling the assets quickly and unsystematically.
Another potential disadvantage of a systematic liquidation is that it may not
be possible to sell all of the company's assets for their full value. In some
cases, the market for a particular type of asset may be weak, which can make
it difficult to sell the assets for the prices that the company's owners or
creditors would like. This can lead to a lower overall recovery from the
liquidation process, which can be frustrating for all involved.
Q2:ACE Corp was formed five (5) years ago by the original founders
and some venture capitalists (VC) with five million shares, three
million held by the VCs priced at $2.50 per share and 2 million held
by the founders priced at $0.50 per share. ACE estimates its free
cash flows that will be available to the enterprise next year at
$5,200,000. Since the venture is now in its maturity stage, ACE’s
free cash flows are expected to continue to grow at a 6% annual
compound growth rate in the future. A weighted average cost of
capital (WACC) for the venture is estimated at 15%. Interest-bearing
debt owed by ACE is $17.5 million. In addition, the venture also has
surplus cash of $4 million.
1. Based on the above information, estimate the current total value of ACE
Corp.
It is not possible to determine the current total value of ACE Corp based
on the information provided. In order to calculate the total value of a
company, a variety of factors must be considered, including the
company's assets, liabilities, cash flows, and growth potential. In addition,
information about the company's capital structure, such as the number of
shares outstanding and their market price, is also important. Without this
information, it is not possible to accurately estimate the current total
value of ACE Corp.
2. What would be the value of the ACE’s equity?
3. How much of the value of ACE would belong to the VCs and how much to
the founders?
4. How much would be the per share value of ACE’s equity?
5. What would be the percentage gain on VC’s investment?
6. What would be the percentage gain on founders’ investment?
7. What is the internal rate of return on the founders’ investment?
8. What is the internal rate of return on the VC’s investment?
Q3:The GAMA firm is proposing to acquire the ACE Products venture
described in item 2 above. GAMA estimates that ACE’s free cash flow
for next year could be improved to $5.5 million because of
synergistic benefits in the form of operating or distribution
economies. The potential acquirer also believes that ACE’s
perpetuity growth rate could be increased to 7 % annually. However,
the riskiness of the cash flows would be increased causing the
appropriate WACC to increase to 16 %. Interest-bearing debt owed
by ACE is $17.5 million. In addition, the venture also has surplus
cash of $4 million. ACE Products has five million shares of common
stock outstanding.
1. Determine ACE’s total value from the perspective of GAMA. What is ACE’s
equity worth to GAMA in dollar amount and on a per share basis?
To determine ACE's total value from the perspective of GAMA, GAMA
would need to first calculate the present value of ACE's future cash flows.
This can be done using the following formula:
Present value = Future cash flow / (1 + WACC)^number of periods
In this case, we know that ACE's free cash flow for next year is $5.5
million, and the appropriate WACC is 16%. To determine the present value,
we would need to know the number of periods over which the cash flows
will be generated. If the perpetuity growth rate is 7% annually, we can
assume that the cash flows will continue indefinitely, in which case we can
use the formula for the present value of a perpetuity:
Present value = Future cash flow / WACC
Substituting in the known values, we get:
Present value = $5.5 million / 0.16 = $34.375 million
To determine the equity value, we need to subtract the value of ACE's
interest-bearing debt and surplus cash from the present value. We know
that ACE has $17.5 million in interest-bearing debt and $4 million in
surplus cash, so the equity value would be:
Equity value = $34.375 million - $17.5 million - $4 million = $12.875
million
Since ACE has 5 million shares of common stock outstanding, the
equity value per share would be:
Equity value per share = $12.875 million / 5 million = $2.575 per share.
2. Use the per share value of ACE from the previous problem (problem 2)
above and determine the GAMA’s expected per share synergetic benefits
from this merger.
3. If one-half of the synergy derived benefits were allocated to ACE’s VCs
and founders, what price per share would the merger take place.
4. GAMA has thirty million shares of stock outstanding with a market
capitalization value of $600 million.
Q4:What is GAMA’s intrinsic value per share?
Q5:Determine the exchange ratio between ACE’s share and GAMA’s
share at ACE’s value established in Part C. That is, what would ACE’s
venture investors and founders receive for the shares they exchange
with GAMA’s shares?
