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Value of a target company based on comparable company and comparable transaction analyses

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CaseCasePro Forma Income Statement and Other Financial Data for Duo SystemsIncome Statement (in $ 000)12345Revenue 10,00011,00012,50014,00016,500COGS5,5006,5007,5008,5009,500Gross Profit4,5004,5005,0005,5007,000SG&A1,3001,5501,7001,8002,000Depreciation450490530570610EBIT2,7502,4602,7703,1304,390Net Interest Expense700660600550500EBT2,0501,8002,1702,5803,890Income Tax8557681,0411,1491,257Net Income1,1951,0321,1291,4312,633

Other Financial Data (in $ 000)Change in Working capital384415452493537Change in deferred Taxes1719222527Capital Expenditures1,1041,1921,3001,4171,544

Comparable Company StatisticsDuo Systems Mouse CorporationPad Inc.Wire DynamicsCurrent stock price ($)33.0055.0038.00110.00Earnings per share (EPS) ($)1.802.752.153.70Book value per share ($)10.2016.9512.2035.60Sales per share ($) 30.1051.8037.65109.15

Comparable Transaction StatisticsPage CorporationCover IndustriesWrap CorpStock price pre-takeover ($)18.2026.9542.80Acquisition stock price - Deal Price ($)21.8033.8053.15Earnings per share (EPS) ($)1.101.702.50Book value per share ($) 6.2510.1514.00Sales per share ($)17.5027.1039.95

Core Industries is considering acquiring Duo Systems through a hostile takeover. Their plan is to make a tender offer directly to the shareholders of Duo Systems. Eva Fox, a financial analyst with Core, has been asked to estimate a fair acquisition price for the offer. Fox has considered using three different valuation methods to estimate the acquisition price and has gathered the required financial data for this purpose.

Calculate the appropriate valuation metrics and using the mean of those metrics, and estimate the price that Core Industries should pay for the Duo System using DFC, comparable company and comparable transaction analysis.

Duo Systems has 1 million shares outstanding. From sixth year onwards, Fox expects Duos free cash flows to grow at a constant rate of 7% per year. She also determines that Duos weighted average cost of capital of 9.5% is the appropriate discount rate to use for the analysis.

Fox did some research and found three companies from the same industry as Duo, and with a similar capital structureMouse Corporation, Pad Inc., and Wire Dynamics. In addition, Fox could gather data for three takeover transactions with characteristics similar to DuoPage Corporation, Cover Industries, and Wrap Corp. Data gathered by Fox are shown in the following figure.

DCFAssumptionsConstant growth rate7%WACC9.5%Number of shares (in "000")1000Tax Rate30%All no. are in $ 000 mentioned unless otherwise12345Free Cash FlowNet Income1,1951,0321,1291,4312,633Add: Interest *(1-tax)490462420385350Add: Depreciation450490530570610Add: Change in deferred Taxes1719222527Less: Change in Working capital(384)(415)(452)(493)(537)Less: Capital Expenditures(1,104)(1,192)(1,300)(1,417)(1,544)Free Cash Flow6643963495011,539Terminal Value65,869Total Free Cash Flow66439634950167,408

Pv of Free Cash Flow60633026634842,820Target Value43

Com.CompanyComparable Company Analysis

All no. are in $ 000 mentioned unless otherwiseMouse CorporationPad Inc.Wire DynamicsMean RatioComparable Company StatisticsP/E Ratio20183022P/B Ratio3333P/S Ratio1111Duo Systems StatisticsEarnings per share (EPS) ($)2Book value per share ($)10Sales per share ($) 30Estimted Duo Systems Stock ValueBased on P/E Ratio40Based on P/B Ratio32Based on P/S Ratio31Mean Estimated Stock Value34Takeover Premium Target Company StatisticsPage CorporationCover IndustriesWrap CorpStock price pre-takeover ($)182743Acquisition stock price ($)223453Takeover premium 20%25%24%Mean Takeover premium 23%

Acquisition Price42

Com.TransactionComparable Transaction All no. are in $ 000 mentioned unless otherwisePage CorporationCover IndustriesWrap CorpMean RatioComparable Transaction StatisticsP/E Ratio19.8219.8821.2620.32P/B Ratio3.493.333.803.54P/S Ratio1.251.251.331.27

Duo Systems StatisticsEarnings per share (EPS) ($)2Book value per share ($)10Sales per share ($) 30

Estimted Duo Systems Stock ValueBased on P/E Ratio37Based on P/B Ratio36Based on P/S Ratio38Mean Estimated Stock Value (Acquisition Price)37
neevpankaj: neevpankaj:Since we used deal prices from actual transactions asthe basis for our analysis, there is no need to calculate a separate transaction premiumbecause it is already incorporated into the price.