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Case
Core Industries is considering acquiring Duo Systems through a hostile takeover. Their plan is to mak
directly to the shareholders of Duo Systems. Eva Fox, a financial analyst with Core, has been asked t
acquisition price for the offer. Fox has considered using three different valuation methods to estimat
price and has gathered the required financial data for this purpose.
Pro Forma Income Statement and Other Financial Data for Duo Systems
Income Statement (in $ 000)
FY 01
FY 02
Revenue
10,000
11,000
COGS
5,500
6,500
Gross Profit
4,500
4,500
SG&A
1,300
1,550
Depreciation
450
490
EBIT
2,750
2,460
Net Interest Expense
700
660
EBT
2,050
1,800
Income Tax
855
768
Net Income
1,195
1,032
Other Financial Data (in $ 000)
Change in Working capital
Change in deferred Taxes
Capital Expenditures

384
17
1,104

415
19
1,192

FY 03
12,500
7,500
5,000
1,700
530
2,770
600
2,170
1,041
1,129

452
22
1,300

Duo Systems has 1 million shares outstanding. From sixth year onwards, Fox expects Duos free cash
constant rate of 7% per year. She also determines that Duos weighted average cost of capital of 9.5
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 simila
Mouse Corporation, Pad Inc., and Wire Dynamics. In addition, Fox could gather data for three takeove
characteristics similar to DuoPage Corporation, Cover Industries, and Wrap Corp. Data gathered by
the following figure.

Comparable Company Statistics

Current stock price ($)
Earnings per share (EPS) ($)
Book value per share ($)
Sales per share ($)
Comparable Transaction Statistics
Stock price pre-takeover ($)
Acquisition stock price - Deal Price ($)
Earnings per share (EPS) ($)
Book value per share ($)
Sales per share ($)

Duo Systems
33.00
1.80
10.20
30.10

Mouse
Corporation
55.00
2.75
16.95
51.80

Pad Inc.
38.00
2.15
12.20
37.65

Page Corporation
18.20
21.80
1.10
6.25
17.50

Cover Industries
26.95
33.80
1.70
10.15
27.10

Wrap Corp
42.80
53.15
2.50
14.00
39.95

Calculate the appropriate valuation metrics and using the mean of those metrics, and estimate the p
Industries should pay for the Duo System using DFC, comparable company and comparable transact

Calculate the appropriate valuation metrics and using the mean of those metrics, and estimate the p
Industries should pay for the Duo System using DFC, comparable company and comparable transact

r. Their plan is to make a tender offer

ore, has been asked to estimate a fair
methods to estimate the acquisition

FY 04
14,000
8,500
5,500
1,800
570
3,130
550
2,580
1,149
1,431

FY 05
16,500
9,500
7,000
2,000
610
4,390
500
3,890
1,257
2,633

493
25
1,417

537
27
1,544

pects Duos free cash flows to grow at a

cost of capital of 9.5% is the

uo, and with a similar capital structure

ata for three takeover transactions with
rp. Data gathered by Fox are shown in

Wire Dynamics
110.00
3.70
35.60
109.15

s, and estimate the price that Core

comparable transaction analysis.

s, and estimate the price that Core

comparable transaction analysis.

Assumptions
Constant growth rate
WACC
Number of shares (in "000")
Tax Rate
All no. are in $ 000 mentioned unless otherwise
Free Cash Flow
Net Income
Add: Interest *(1-tax)
Add: Depreciation
Add: Change in deferred Taxes
Less: Change in Working capital
Less: Capital Expenditures
Free Cash Flow
Terminal Value
Total Free Cash Flow
Pv of Free Cash Flow
Target Value

7%
9.5%
1000
30%

43

FY 01

FY 02

FY 03

FY 04

FY 05

1,195
490
450
17
(384)
(1,104)
664

1,032
462
490
19
(415)
(1,192)
396

1,129
420
530
22
(452)
(1,300)
349

1,431
385
570
25
(493)
(1,417)
501

664

396

349

501

2,633
350
610
27
(537)
(1,544)
1,539
65,869
67,408

606

330

266

348

42,820

Comparable Company Analysis

All no. are in $ 000 mentioned unless otherwise

Comparable Company Statistics
P/E Ratio
P/B Ratio
P/S Ratio
Duo Systems Statistics
Earnings per share (EPS) ($)
Book value per share ($)
Sales per share ($)

2
10
30

Estimted Duo Systems Stock Value

Based on P/E Ratio
Based on P/B Ratio
Based on P/S Ratio
Mean Estimated Stock Value

40
32
31
34

Takeover Premium
Target Company Statistics
Stock price pre-takeover ($)
Acquisition stock price ($)
Takeover premium
Mean Takeover premium
Acquisition Price

23%
42

Mouse
Corporation

Pad Inc.

Wire Dynamics

Mean Ratio

20
3
1

18
3
1

30
3
1

22
3
1

Page Corporation
18
22
20%

Cover Industries
27
34
25%

Wrap Corp
43
53
24%

Comparable Transaction

All no. are in $ 000 mentioned unless otherwise

Comparable Transaction Statistics
P/E Ratio
P/B Ratio
P/S Ratio
Duo Systems Statistics
Earnings per share (EPS) ($)
Book value per share ($)
Sales per share ($)

2
10
30

Estimted Duo Systems Stock Value

Based on P/E Ratio
Based on P/B Ratio
Based on P/S Ratio
Mean Estimated Stock Value (Acquisition Price)

37
36
38
37

Page Corporation
19.82
3.49
1.25

Cover Industries
19.88
3.33
1.25

Wrap Corp
21.26
3.80
1.33

Mean Ratio
20.32
3.54
1.27