Question

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 1 year ago

APV Problem: SAE Corp., a large cap tech firm, is evaluating the possible acquisition of the...

APV Problem: SAE Corp., a large cap tech firm, is evaluating the possible acquisition of the Benchmark Company, an electronic manufacturer. SAE Corp’s analyst projects the following post-merger free cash flows in ($millions). 2020 2021 2022 2023 Net Sales $ 200.0 $ 230.0 $ 257.0 $ 269.8 Cost of Goods Sold 130.0 140.0 145.0 150.0 Selling/G&A Expenses 20.0 25.0 30.0 32.0 EBIT $ 50.0 $ ...

Martin Technologies Inc., a large electronics company, is evaluating the possible acquisition of Columbia Electronics, a...

Martin Technologies Inc., a large electronics company, is evaluating the possible acquisition of Columbia Electronics, a regional electronics company. Martin’s analysts project the following post-merger data for Columbia (in millions of dollars): 2015 2016 2017 2018 Net sales $300 $425 $475 $550 Selling and administrative expense 40 50 60 75 Interest 25 30 35 40 Tax rate after merger 35% Cost of goods sold as a percent of sales 75% Beta after merger 1.2000 Risk-free rate 4% Market risk premium...

Merger Analysis TransWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Georgia...

Merger Analysis TransWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Georgia Cable Company (GCC), a regional cable company. TransWorld's analysts project the following post-merger data for GCC (in thousand of dollars): 2015 2016 2017 2018 Net Sales $482 $540 $584 $631 Selling and administrative expense 42 52 61 69 Interest 18 21 24 27 Tax rate after merger 30% Cost of goods sold as a percent of sales 80% Beta after merger 1.663 Risk-free rate...

TTT Corp is evaluating the acquisition of KT Company. TTT analyst projects the following post merger cash...

TTT Corp is evaluating the acquisition of KT Company. TTT analyst projects the following post merger cash flows for KT Company if purchased by TTT Corp. Net Sales Year 1 $600 Year 2 $700 Oper Expenses Year 1 $350 Year 2 $400 Interest Year 1 20 Year 2 25 Depreciation Year 1 10 Year 2 10 Net Investment Year 1 10 Year 2 10 In Operating Capital The current market beta for KT Company is 1.4 and its tax rate is 25%...

BT Alex Brown Analysts are evaluating Energen (NYSE: EGN) for possible inclusion in a small-cap oriented...

BT Alex Brown Analysts are evaluating Energen (NYSE: EGN) for possible inclusion in a small-cap oriented portfolio. EGN is a diversified energy company involved in oil & gas products. As a result of EGN’s aggressive program of purchasing oil and gas producing properties, BT Alex Brown expects above-average growth for the next five years. The analysts establish the following facts and forecasts for EGN: Current market price is $20 Current dividends are $0.54 Required return on equity is 11% Initial...

A company is evaluating the acquisition of a machine. The alternatives you have are two. The...

A company is evaluating the acquisition of a machine. The alternatives you have are two. The data is shown in the following table. Find the net present value of machine Y. (DISCOUNT RATE IS 10%) Concept Machine Y Initial Cost ($) - 46,000 Annual cost ($ / year) - 15,000 Salvage Value ($) 24,000 Life in years 3

A company is evaluating the proposed acquisition of a new machine. The machine’s base price is...

A company is evaluating the proposed acquisition of a new machine. The machine’s base price is $108,000, and it would cost another $12,500 to modify it for special use. Depreciation rates are 0.33, 0.45, and 0.15 for years 1, 2, and 3, respectively, and it would be sold after 3 years for $65,000. The machine would require an increase in net working capital (inventory) of $5,500. The machine would have no effect on revenues, but it is expected to save...

The Alabama Cotton Company is evaluating the proposed acquisition of a new weaving machine. The machine's...

The Alabama Cotton Company is evaluating the proposed acquisition of a new weaving machine. The machine's base price is $180,000, and it would cost another $25,000 to modify it for special use by the firm. The machine is classified as a MACRS 3-year asset, and it can probably be sold for $80,000 at the end of the third year. The machine would require an increase in net working capital of $7,500. The machine would have no effect on revenues, but...

The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machines base...

The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machines base price is $ 108,000, and it would cost another $ 12,500 to modify it for special use. The machine falls into the MACRS 3- year class, and it would be sold after 3 years for $ 65,000. The machine would require an increase in inventory of $ 5,500. The milling machine would have no effect on revenues, but it is expected to save the...

The XYZ Company is evaluating the acquisition of new equipment. The equipment’s base price is $150,000,...

The XYZ Company is evaluating the acquisition of new equipment. The equipment’s base price is $150,000, and it would cost another $16,000 to modify it for special use by the firm. The equipment falls into the MACRS 3-year class (33% depreciation in year 1, 45% in year 2, 15% in year 3, and 7% in year 4), and it would be sold after 3 years for $75,000. The equipment will require an increase in net working capital of $7,500. The...