C. DUSTIN ELECTRIC INC. IS ABOUT TO BE ACQUIRED BY THE FIRM’S

| June 9, 2016

Question
C. DUSTIN ELECTRIC INC. IS ABOUT TO BE ACQUIRED BY THE FIRM’S MANAGEMENT FROM THE FIRM S FOUNDER FOR $15 MILLION IN CASH. THE PURCHASE PRICE WILL BE FINANCED WITH $10 MILLION IN NOTES THAT ARE TO BE REPAID IN $2 MILLION INCREMENTS OVER THE NEXT FIVE YEARS. AT THE END OF THIS FIVE -YEAR PERIOD, THE FIRM WILL HAVE NO REMAINING DEBT. THE FCFS ARE EXPECTED TO BE $3 MILLION A YEAR FOR THE NEXT FIVE YEARS. BEGINING IN YEAR 6, THE FCFS ARE EXPECTED TO GROW AT A RATE FO 2% PER YEAR INTO THE INDEFINITE FUTURE. IF THE UNLEVERED COST OF EQUITY FOR DUSTIN IS APPROXIMATELY 15% AND THE FIRM ‘S BORROWING RATE ON THE BUYOUT DEBT IS 10% (BEFORE TAXES AT A RATE OF 30%), WHAT IS YOUR ESTIMATE OF THE VALUE OF THE FIRM ?

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