What is a systematic liquidation of a venture?

This Professional Assignment (CLA2) requires a minimum of six (6) pages (excluding tables, graphs, appendices, title, and reference pages) APA formatted Word Document in response to the following questions. Your answers should be clear, well-organized, and specific. Provide a concise, cogent argument and include details to support your response.

1. What is a systematic liquidation of a venture? What are some of the advantages and disadvantages of a systematic liquidation?

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2. ACE Corp was formed five (5) years ago by the original founders and some venture capitalists (VC) with five million shares, three million held by the VCs priced at $2.50 per share and 2 million held by the founders priced at $0.50 per share. ACE estimates its free cash flows that will be available to the enterprise next year at $5,200,000. Since the venture is now in its maturity stage, ACE’s free cash flows are expected to continue to grow at a 6% annual compound growth rate in the future. A weighted average cost of capital (WACC) for the venture is estimated at 15%. Interest-bearing debt owed by ACE is $17.5 million. In addition, the venture also has surplus cash of $4 million.

a. Based on the above information, estimate the current total value of ACE Corp.

b. What would be the value of the ACE’s equity?

c. How much of the value of ACE would belong to the VCs and how much to the founders?

d. How much would be the per share value of ACE’s equity?

e. What would be the percentage gain on VCs investment

f. What would be the percentage gain on founders’ investment ?

g. What is the internal rate of return on the founders’ investment?

h. What is the internal rate of return on the VC’s investment?

3. The GAMA firm is proposing to acquire the ACE Products venture described in item 2 above. GAMA estimates that ACE’s free cash flow for next year could be improved to $5.5 million because of synergistic benefits in the form of operating or distribution economies. The potential acquirer also believes that ACE’s perpetuity growth rate could be increased to 7 % annually. However, the riskiness of the cash flows would be increased causing the appropriate WACC to increase to 16 %. Interest-bearing debt owed by ACE is $17.5 million. In addition, the venture also has surplus cash of $4 million. ACE Products has five million shares of common stock outstanding.

a. Determine ACE’s total value from the perspective of GAMA. What is ACE’s equity worth to GAMA in dollar amount and on a per share basis?

b. Use the per share value of ACE from the previous problem (problem 2) above and determine the GAMA’s expected per share synergetic benefits from this merger.

c. If one-half of the synergy derived benefits were allocated to ACE’s VCs and founders, what price per share would the merger take place.

d. GAMA has thirty million shares of stock outstanding with a market capitalization value of $600 million.

● What is GAMA’s intrinsic value per share?

● Determine the exchange ratio between ACE’s share and GAMA’s share at ACE’s value established in Part C. That is, what would ACE’s venture investors and founders receive for the shares they exchange with GAMA’s shares.

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