Update Investment

Topics: Stock market, Discounted cash flow, Generally Accepted Accounting Principles Pages: 2 (292 words) Published: March 19, 2013

Dear students, unfortunately, I have to cancel our practice session on Saturday. Please try practicing the problem below on your own (I will post additional questions tomorrow). We will discuss it on Monday. Also, on Monday, we will deal with the remaining questions on Hertz IPO case.

Practice Quiz

Vanguard Office Supplies (VOS) is a nationwide retail chain that offers office supplies and office furniture. Company management has decided that, from both a competitive and a cost-cutting view, Vanguard should offer its own private-label brands for products like student notebooks, fillers, ledgers and journals. To accomplish this objective, Vanguard is considering the purchase of Omega Paper, a manufacturer of paper products and notebooks. A five year income forecast for Omega is given below. Vanguard plans to keep Omega’s debt-equity ratio at its current level.

 | Year 1| Year 2| Year 3| Year 4| Year 5|
Operating Cash Flow after tax| 69| 65.7| -2.7| 33.9| 67.9| Capital Expenditures| 1.8| 4.2| 0.2| 3.8| 4.7|

| |
Other information:| |
Tax rate| 35%|
Book value of debt ($MM)| 165|
Book value of equity ($MM)| 375.9|
Share price ($)| 10.3|
Beta| 0.81|
Shares outstanding(MM)| 52.3|
Interest rate on company debt| 4.95%|
Current bond yields on similarly rated companies| 5.15%|
Inflation| 2.30%|
Average Market Return 1926 - 2005| 11.50%|
Excess Cash on hand ($MM)| 38|
Average Market Risk Premium | 8.20%|

1. Calculate the equity value per share of Omega using the discounted cash flow method. 2. Vanguard announces a purchase price of $12 per share. Do you think it is a fair price? 3. You are advising Omega; only considering price, should Omega accept or reject this offer?
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