Problem 2.6 and 2.7 The buyer of Problem 2.5

Problem 2.6 and 2.7  The buyer of Problem 2.5

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2.6 The buyer of Problem 2.5 is also considering the possibility of financing the acquisition with an alternative structure designed to maintain the interest coverage ratio at 4.87 times. (Interest coverage is here defined as the ratio of EBITDA to interest expense.) The casts of debt and equity would he 7% and 14.21%, respectively, and the tax rate would be 38%. How much can the buyer afford to pay for Fleet Meat Packing Co. under this financing plan? Compare your result to those obtained for the previous two problems and explain the differences, if any.

2.7 TN Inc.. a manufacturer of computer storage devices, is planning to go public at the end of 2007. The purpose of the IPO is to retire debt and liquefy the position of some of its original investors. Future growth will he financed by TPI's internally generated cash flow and the additional borrowing made possible by the expected increase in the company debt capacity.

The company has put together the following projection:

 

(S millions)	2008	2009	2010	2011	2012
EBIT	24.8	28.0	32.0	34.0	37.0
Depreciation	5.8	7.6	9.2	10.2	11.0
Increase in deferred taxes	0.8	0.6	0.7	0.7	1.0
Capital expenditures	18.2	12.2	14.3	14.3	12.0
Net working capital change	(0.8)	(0.8)	1.0	1.8	0

Currently, TPI has net debt of $112 million, but its CFO has already negotiated retiring $53 million with the proceeds of the equity issue and refinancing the rest at 7.86%. As a consequence, TPI • expected to begin 2008 with its net debt reduced to $59 million and its interest coverage ratio (here defined as EBIT-to-interest) increased to about 5.99. The CFO plans to maintain the coverage ratio at that level afterwards and expects to raise future debt at an interest rate of about 8%.