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Please see the attached document and answer the questions at the end. Some intro, work shown and conclusion should be included.

Mini Case #3: Capital Budgeting at Neuquén, Inc.


Assignment Overview


Neuquén, Inc., a publicly traded firm, is considering the acquisition of a private


company,, which specializes in restoring damaged artwork and vintage


photographs for high net worth individuals. Neuquén?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.?


Neuquén, 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 trading at a yield to maturity of 6.2%.


You have been hired as a consultant to Neuquén to evaluate the proposed acquisition


of There is considerable dissension among senior management and the


board about whether the acquisition should be undertaken. 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 Neuquén management and a review of Artforever?s financial


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



Forecast Data for (in $?000)

































Investment in CapEx and NWC




































Interest payments


















Sales Revenue 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 corporate tax rate is 40% and its current cost of


borrowing is 6.2%.



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


its assessment of the probability and costs of financial distress. You note that this is


different from the capital structure of Neuquén and wonder how this would factor into


your analysis.


Although 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 2021 will be a more modest 2.0% per year.


Your analysis of market data yielded the information in Table 2 below.


Market Data



Current yield to maturity on 30 year treasury bonds


Current yield to maturity on 3 month treasury bills


Most recent 1-year return on the S&P 500


Estimate of expected average return on the S&P 500 over the next 30 years












Your analysis of industry reveals that most of the firms in the industry,


like Artforever, are private firms. However, you find a close competitor,,


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.


Your 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. Assume that both companies face a similar tax rate.


Guidelines for Case Analysis


The following aids are permitted for this analysis: You may use internet sources,


books, 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 that is not a member of your assigned


group, whether or not they have current or past affiliation with Texas A&M University


Corpus Christi.


The case is due on the date indicated on the course schedule. Late papers may be


accepted with a reasonable excuse, but will be assessed a 20% grade reduction


penalty. Cases should be typed in 12-point font, double-spaced, with a minimum


of 1 inch margins.


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 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 ?Neuquén, 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


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 Assume that your


valuation is performed at the end of 2016, 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


Neuquén should pay to equity shareholders for


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.



Your report is intended for the senior management of Neuquén, Inc., so be sure that


you write in a professional style that is easy to follow.




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Oct 15, 2019





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