Question

Kenneth Cole Productions? (KCP) was acquired in 2012 for a purchase price of $15.49 per share. KCP had 18.718.7 million shares? outstanding, $43.8 million in cash and no debt at the time of the acquisition.

a. Given a weighted average cost of capital of 10.7%?, and assuming no future? growth, what level of annual free cash flow would justify this acquisition? price?

b. If? KCP's current annual sales are $475 ?million, assuming no net capital expenditures or increases in net working? capital, and a tax rate of 35%?, what EBIT margin does your answer in part ?(a?) require.

Answer 1

Common Stock = Share price * no of shares = 15.49 * 18,718,700 = 289,952,663
Cash in hand = 43.8 million
Total value = 289,952,663 + 43,800,000 = 333.752,663

a) Value of firm = Free cash flow / Weighted average Cost of Capital
Free cash flow = Value of firm * WACC = 33,752,663 * 0.107 = 35,711,534.94

d) EBIT = Free cash flow / (1- tax rate) = 55,940,822.9846
EBIT margin = EBIT/ Sales = 55,940,822.9846/475,000,000 = 0.11567 or 11.57%

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