Alpha Corporation has earnings before interest and tax (EBIT) per annum in perpetuity of $200,000. The...

Alpha Corporation has earnings before interest and tax (EBIT) per annum in perpetuity of $200,000. The tax rate is 30%. The firm is funded $50,000 of debt and $150,000 of equity. The cost of equity is 18% and the cost of debt is 6%.

Given the information above, what is the appropriate discount rate if earnings before interest and tax (EBIT) are used to calculate the value of the firm?

	A.	20.79%
	B.	25.71%
	C.	18%
	D.	14.55%
	E.	None of the above

Firm A has a value of $500 million and Firm B has a value of $300 million. Firm A has 1000 shares outstanding, and Firm B has 800 shares outstanding. Suppose that the merger would increase cash flows of the combined firm by $5 million in perpetuity. Assuming the cost of capital for the new firm is 5%.

Suppose that instead of paying cash, Firm A acquires B by offering two (new) shares of A for every three shares of B. The net gain to Firm A's shareholders is around:

	A.	$30 million
	B.	$10 million
	C.	$70 million
	D.	$87 million
	E.	None of the above

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago

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