- Cheek Products, Inc

 a conglomerate with major divisions in the snack food industry, home security systems,
cosmetics, and plastics etc.
 is financed entirely with equity.
 in recent years, the company has been underperforming
Meg Walden (financial analyst) believes that the company is a good candidate for a leveraged
buyout.
- LBO
 is an acquisition of a company by a small group of equity investors.
 is financed primarily with debt.
 reverse the LBO within 3 to 7 years by way of a public offering or sale of the company to
another firm.
 only be successful if it's able to generate enough cash to service the.
- Meg has suggested this LBO to Ben and Brenton.
The question: if Meg Ben and Brenton decide to undertake the LBO, what is the most they
should offer per share?
- Approaches to evaluation for the levered firm:
 Adjusted Present Value Approach (APV) APV=NPV+NPVF
 Flow to Equity Approach (FTE) which we give the steps
step 1 calculate the levered cash flows
step 2 calculate RE
step 3 value the levered cash flows at RE
 Weighted Average Cost of Capital (WACC) RWACC = *RS +*RB*(1-tC)
- Here are some of the numbers that are given in the problem:
ROA 14%
Debt yield to maturity 12.5%
Debt rate after year 5 8%
Terminal D/E ratio 25%
Terminal growth rate 3.5%
Outstanding shares (millions) 425
Stock price 29
Corporate tax rate 40%

- Steps to calculate APV

 Step 1: calculate the present value of unlevered cash flows for the first five years
 Step 2: calculate the present value of unlevered cash flows beyond the first five years
 Step 3: calculate the present value of interest tax shield for the first five years
 Step 4: calculate the present value of interest tax shield beyond the first five years