WALTHAM, INC.: Acquisition Of Artforever.Com

Case #2 template(1).xlsx


Data from Case Table 1
2013 2014 2015 2016 2017
Sales Revenue 1,000.00 1,250.00 1,875.00 2,100.00 3,750.00
Investment in CapEx and NWC 25 55 170 80 80
Depreciation 15 30 50 72 80
Interest payments 94.4 101.4 108.6 115.9 122.4
Data from Case Table 2
Current YTM on 30 year treasury bonds 2.50%
Current YTM on 3 month treasury bills 2.00%
Most recent 1-year return on S&P 500 5.30%
Estimated annual return on the S&P 500 for next 30 years 8.00%
WACC Estimate
Marginal tax rate 40%
Target Debt to Value Ratio 15.0%
Terminal growth rate 2.0%
Expected return on market 8.0%
Rf 2.5%
Rd 6.2%
Market Risk Premium
Data for comparable firm (ArtToday.net):
Levered beta 1.5
Debt to Equity 0.75
Unlevered beta
Data for Artforever.com:
Unlevered beta
Target D/E
Levered beta
Free Cash Flow Estimate
Marginal tax rate 40%
COGS as % of revenues 42%
SG&A as % of revenues 15%
2013 2014 2015 2016 2017
Less: COGS
Less: SG&A
Equals: EBIT
Less: Taxes @ 40%
Equals: EBIAT
Add: Depreciation
Less: Investments in Capex & NWC
Equals: Free Cash Flow
WACC Valuation 2013 2014 2015 2016 2017
Free Cash Flows
Terminal Value
PV(Free Cash Flows)
PV (Terminal Value of FCF)
Value of Artforever.com
Value of Equity of Artforever.com




WALTHAM, INC.: Acquisition of Artforever.com


Waltham, Inc., a publicly traded firm, is considering the acquisition of a private company, Artforever.com,

which specializes in restoring damaged artwork and vintage photographs for high net worth individuals.

Waltham’s CEO and chairman of the board, Willie Ray, described the motivation for the acquisition as

follows: “We are running out of profitable investment opportunities in our core vintage shoe restoration

business, and our shareholders expect us to continue to grow. Therefore, we must look to acquisitions to

expand into growing markets.”


Waltham, Inc.’s common stock is currently trading at $50 per share, and the firm has 100,000 shares

outstanding. The book value of the common stock is $20 per share. However, as mentioned by Mr. Ray,

sales had been slowing recently and the board was concerned that soon the share price would also begin

to flag as investors figured out that the firm was running out of positive NPV investments. The firm has

$2,000,000 market value of bonds with a coupon rate of 5%, which are currently trading at a yield to

maturity of 6.2%.


You have been hired by Waltham to evaluate the proposed acquisition of Artforever.com. Your job is to

perform a thorough analysis of the merits of the proposed acquisition and make a recommendation to

senior management.


After several meetings with Waltham management and a review of Artforever’s financial performance and

industry structure, you gathered the data shown in Table 1 below.

Table 1

Forecast Data for Artforever.com (in $’000)

2013 2014 2015 2016 2017

Sales Revenue 1,000.0 1,250.0 1,875.0 2,100.0 3,750.0

Investment in CapEx and NWC

25.0 55.0 170.0 80.0 80.0

Depreciation 15.0 30.0 50.0 72.0 80.0

Interest payments 94.4 101.4 108.6 115.9 122.4


Artforever.com currently has $1,475,000 (market value) in long-term debt, with a coupon rate of 7%. Its

cost of goods sold (COGS) is expected to be 42% of sales revenues, and selling, general and

administrative (SG&A) expenses are expected to be 15 percent of revenues. The depreciation numbers

listed above are already included in COGS percentage estimates. The firm’s current cost of borrowing is





Your research indicates that Artforever has a target debt to value ratio of 15%, based on its

management’s assessment of the probability and costs of financial distress. You note that this is different

from the capital structure of Waltham and wonder how this would factor into your analysis.


Although Artforever.com is a rapidly growing company, your analysis of industry structure suggests that

competition in the art restoration market is likely to increase in the next few years. Thus, you forecast

that the perpetual growth rate for free cash flows beyond 2017 will be a more modest 2.0% per year.


You have also gathered the market data in Table 2 below.

Table 2

Market Data

Current yield to maturity on 30 year treasury bonds 2.50% Current yield to maturity on 3 month treasury bills 2.0% Most recent 1-year return on the S&P 500 5.3% Estimate of expected average return on the S&P 500 over the next 30 years



Your analysis of Artforever.com’s industry reveals that most of the firms in the industry, like Artforever,

are private firms. However, you find a close competitor, ArtToday.net, that is in the same line of business

and is publicly traded. ArtToday has a long-term target debt to equity ratio of 0.75, and has been

historically quite close to that target. A regression analysis of ArtToday’s historical returns against the

market returns yields an equity beta of 1.5. ArtToday currently has 50,000 common shares outstanding

trading at $12 per share. The corporate tax rate is 40% for all firms.







This is a group case project and each group member is expected to fully participate in the analysis. The following aids are permitted: You may use your textbook, all posted materials (including Discussion Board Q&A), and your notes. Any other aids are unauthorized and their use constitutes a violation of academic integrity. This includes face-to-face or electronic correspondence concerning the specific details of the case with any other person or entity outside of your group, whether or not they have current or past affiliation with Washington State University. The case report should be written according to the following format:

1. Introduction 2. Analysis 3. Conclusion

The introduction sets the stage for the work to follow and should consist of a short paragraph of the key problem(s) or issue(s) that your analysis addresses. The analysis will constitute the bulk of the written presentation and will be a direct response to the questions below. Use clear, concise, and complete sentences. Do not use bullet points or numbered paragraphs. The conclusion should be a short paragraph that summarizes the key points of the analysis. Your report should not exceed five pages of double-spaced text (12-point font) with 1 inch margins at the sides, top, and bottom of the page. This does not include exhibits of your computations. You may submit one Excel Spreadsheet that contains all your exhibits, clearly labeled, and appropriately referenced in the text of your report. Your analysis of “Waltham, Inc.” should include answers to the questions below. Do not write the questions verbatim in your report. Instead, write a brief introductory statement that summarizes the question before you proceed with your analysis. 1) What discount rate is appropriate for finding the value of Artforever.com? Write a few paragraphs giving your answer and clearly explaining your reasoning and computations; show detailed computations in your Excel spreadsheet labeled Exhibit 1. 2) What are the relevant cash flows for valuing Artforever.com? Assume that your valuation is performed

at the end of 2012, and that the values shown in Table 1 are end-of-year forecasts. Write a few paragraphs giving your answer and clearly explaining your reasoning and computations; show detailed computations in your Excel spreadsheet labeled Exhibit 2. 3) Based on your answers to questions (1) and (2) above, what is the maximum price that Waltham

should pay to equity shareholders for Artforever.com? Write a few paragraphs giving your answer and clearly explaining your reasoning and computations; show detailed computations in your Excel spreadsheet labeled Exhibit 3. 4) Under what conditions might you consider recommending that management make a higher offer than

your recommended price in (3) above? No computations are necessary, just a short discussion.

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