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The Succotash Company is thinking of acquiring another company as a scale-expansion project. The target firm...

The Succotash Company is thinking of acquiring another company as a scale-expansion project. The target firm has a market value debt-to-equity ratio of 1.0, an equity beta of 1.50, and EBIT of $39,943,900 per year. Succotash’s capital structure is 70% equity and 30% debt, and if it acquires the target firm, will keep the debt ratio at 30%. The risk free rate is 8%, the market risk premium is 8.5%, the tax rate is 34%. Assume that all debt is risk free and that both firms are non-growth firms. Answer the following 4 questions.

  1. What is the value of the target firm’s debt and equity?
  2. What is the target firm’s unlevered beta and unlevered cost of equity?
  3. What discount rate should Succotash use to calculate the NPV of this Acquisition?
  4. What is the most that Succotash should pay for the target firm?

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jeff jeffy answered 2 years ago
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