Kinetic Corporation is considering acquiring High Tech systems

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Kinetic Corporation is considering acquiring High Tech systems. Jim Smith. the vice president of ?nance at Kinetic, has been assigned the task of estimating a fair acquisition price for High Tech. Smith is aware of several approaches that couid be used for this purpose. He plans to estimate the acquisition price based on each of this approaches, and has collected or estimated the necessary ?nancial data. High Tech has 10 million shares of common stock outstanding and no debt. Smith has estimated the post— merger free cash ?ows from High Tech, in millions of dollars, would be 15, 17, 20, and 23 at the end of the following four years. After year 4, he projects the free cash ?ov.r to grow at a constant rate of 6.5 percent a year. He determines that the appropriate rate for discounting these estimated cash ?ows is 1 1 percent He also estimates that after four years High Tech would be worth 23 times its free cash ?ow at the end of the four year. Smith has determined that the three companies — Alpha, Neutron, and Techno — are comparable to High Tech. He has also identi?ed three recent takeover transactions — Quadrant, ProTech, and Automator — that are similar to the takeover of High Tech under consideration. He believes that price—to—earnings, price—to—sales, and price—to—book value per share of these companies could be used to estimate the value of High Tech. The relevant data for the three comparable companies and for High Tech as we as data for three recently acquired companies are given in Exhibit 1 and 2. Please estimate the post merger price of High Tech according to three models: DCF, Comparable companies, Comparable transactions EXHIBIT 1 Selected ?nanciais of comparable companies Valuation variables —COMPANIES Al ha Neutron Techno ' Tech Current stock price 44.00 23.00 51.00 31.00 Earnings per share 3.01 1.68 2.52 1.98 Sales per share 20.16 14.22 18.15 17.23 Book value Er share 15.16 7.18 11.15 10.02 Seiected ?nancials of comparable transactions Valuation variables —CDMPANIES Quadrant ProTech Automator Current stock price 24.90 43.20 29.00 Acquisition stock price 28.00 52.00 34.50 Eamin gs per share 1.40 2.10 2.3 5 Sales per share 10.58 2 0.41 1 5.93 Book value p_er share 8.29 10.14 9.17