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In: Finance

Trans Corp, a large conlomerate is evaluating the possible acquisition of the chip company. Transcorp analysts...

Trans Corp, a large conlomerate is evaluating the possible acquisition of the chip company. Transcorp analysts project the following post merger incremental cash flows.

Years CF

2003 12

2004 19

2005 23

2006 29

2007 and beyond Constant growth rate at 10%

Chip currently has a market value capital structure debt of 10%, but transcorp would increase it to 50% if the acquisition were made. Chip, if independent pays30% taxes, but its income would be taxed at 40% if consolidated. Chips current market determined beta is 1.80 and its estimated post merger beta would increase to 2.67.The risk free rate stands at 10% and the return on the market is 15%.

What would be the appropriate discount rate for Valuing the acquisition? Ans:23.35%

What would be the total value of Chip company to Transcorp?$Ans:150.21

Chip has $5 million shares outstanding. Chip’s current market price is $32.50. What is the maximum price per share that Transcorp should offer for chip?Ans: $30.04

Expert Solution

A)Appropriate discount rate = Rf +[beta(Rm-Rf)]

10 +[2.67(15-10)]

10 + [2.67*5]

10 +13.35

23.35%

2)Terminal value at end of 2006 =FCF2006(1+g)/(Rs-g)

29(1+.1)/(.2335-.10)

29 *1.1 /.1335

238.9513

total cash fow for year 2006 = 29 +238.9513 = 267.9513

Total value = [PVF 23.35%,1*CF1]+[PVF23.35%,2*CF2]+....[PVF23.35%,4*CF4]

=[.81070*12]+[.65724*19]+[.53282*23]+[.43196*267.9513]

= 9.7284+ 12.4876+ 12.2549+ 115.7442

= $ 150.21

3)Maximum price =Total value /shares outstanding

150.21 /5

= $ 30.04 per share

jeff jeffy answered 2 years ago

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