Fm Ii Smitty's
Financial Management II Smitty’s Home Repair Company Merger Analysis
Submitted to:
Miss Ayesha Aijaz Toor
Submitted By:
Saadain Malik
Shahzaib Khan
Ahmad Raza
Talha Iqbal
Smitty’s home repair company, a regional hardware chain that specializes in “do-it-yourself” materials and equipment rentals, is cash rich because of several consecutive good years. One of the alternative uses for the excess funds is an acquisition. Linda wade, smitty’s treasurer and your boss, has been asked to place a value on a potential target, hill’s hardware, a small chain that operates in an adjacent state, and she has enlisted your help. The table below indicates wade’s estimates of hill’s earnings potential if it came under smitty’s management (in millions of dollars). 2001 2002 2003 2004 NET SALES $60.0 $90.0 $112.5 $127.5 COST OF GOODS SOLD (60%) 36.0 54.0 67.5 76.5 SELLING/ADMINISTRATIVE EXPENSE 4.5 6.0 7.5 9.0 INTEREST EXPENSE 3.0 4.5 4.5 6.0 NECESSARY RETAINED EARNINGS 0.0 7.5 6.0 4.5 The interest expense listed here includes the interest: * On hill’s existing debt, * On new debt that smitty’s would issue to help finance the acquisition, and * On new debt expected to be issued over time To help finance expansion within the new “h division,” the code name given to the target firm. The retentions represent earnings that will be reinvested within the h division to help finance its growth. Hill’s hardware currently uses 40 percent debt financing, and it pays federal-plus-state taxes at a 30 percent rate. Security analysts estimate hill’s beta to be 1.2. If the acquisition were to take place, smitty’s would increase hill’s debt ratio to 50 percent, which would increase
Submitted to:
Miss Ayesha Aijaz Toor
Submitted By:
Saadain Malik
Shahzaib Khan
Ahmad Raza
Talha Iqbal
Smitty’s home repair company, a regional hardware chain that specializes in “do-it-yourself” materials and equipment rentals, is cash rich because of several consecutive good years. One of the alternative uses for the excess funds is an acquisition. Linda wade, smitty’s treasurer and your boss, has been asked to place a value on a potential target, hill’s hardware, a small chain that operates in an adjacent state, and she has enlisted your help. The table below indicates wade’s estimates of hill’s earnings potential if it came under smitty’s management (in millions of dollars). 2001 2002 2003 2004 NET SALES $60.0 $90.0 $112.5 $127.5 COST OF GOODS SOLD (60%) 36.0 54.0 67.5 76.5 SELLING/ADMINISTRATIVE EXPENSE 4.5 6.0 7.5 9.0 INTEREST EXPENSE 3.0 4.5 4.5 6.0 NECESSARY RETAINED EARNINGS 0.0 7.5 6.0 4.5 The interest expense listed here includes the interest: * On hill’s existing debt, * On new debt that smitty’s would issue to help finance the acquisition, and * On new debt expected to be issued over time To help finance expansion within the new “h division,” the code name given to the target firm. The retentions represent earnings that will be reinvested within the h division to help finance its growth. Hill’s hardware currently uses 40 percent debt financing, and it pays federal-plus-state taxes at a 30 percent rate. Security analysts estimate hill’s beta to be 1.2. If the acquisition were to take place, smitty’s would increase hill’s debt ratio to 50 percent, which would increase