Question

In: Finance

You have been given the job of evaluating the following merger candidate. You have collected the...

  1. You have been given the job of evaluating the following merger candidate. You have collected the following cash flow for the acquisition candidate for the proposed merger (in millions):

Year                                                                1                              2                               3                               4                               5__

Cash flows now for canidate 90                            85                               205                            165                            180

Additional cash flows with merger 60                            90                               100                            225                            250

Total cash flows with synergy 150                            175                            305                            390                            430

Risk free rate of return                                                                                                                 3.0%

Beta for this project (the company after merging)                                                         1.5           

Market risk premium                                                                                                                     5.5%      

Pre-tax cost of debt                                                                                                                         3.8%

Marginal tax rate                                                                                                                              25%

Number of shares outstanding for the target company (millions)                         85            

Current market price per share for the target company                                              $48         

Percentage of the acquisition financed with debt                                                           50%

Percentage of the acquisition financed with common equity                                                      50%       

What is the after tax cost of debt?

What is the after tax cost of common equity

What is the weighted average cost of capital for this acquisition candidate?

What is the maximum price per share you are willing to pay for this candidate?

Based on the numbers above, would you pursue this candidate?

Solutions

Expert Solution

The solution for above problem is explained below.

jeff jeffy answered 1 year ago
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