4. Merger analysis - Adjusted present value (APV) approach Wizard Inc., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $14.0 $16.8 $21.0 Interest expense 3.0 3.3 3.6 Debt 33.0 39.0 42.0 Total net operating capital 113.3 115.5 117.7 Global Satellite Corp. (GSC) is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements: • GSC currently has a $28.00 million market value of equity and $18.20 million in debt. • The risk-free rate is 5%, there is a 7.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity SL of 12.10%. • GSC's cost of debt is 7.00% at a tax rate of 40%. ⚫. The projections assume that the company will have a post-horizon growth rate of 6.00%. • Current total net operating capital is $110.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $30 million. • The firm does not have any nonoperating assets such as marketable securities. Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis. (Note: Only round intermediate calculations when entering them as a final answer.) Unlevered cost of equity Horizon value of unlevered cash flows Horizon value of tax shield Unlevered value of operations Value of tax shield Value of operations Thus, the total value of GSC's equity is Value ་་
4. Merger analysis - Adjusted present value (APV) approach Wizard Inc., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $14.0 $16.8 $21.0 Interest expense 3.0 3.3 3.6 Debt 33.0 39.0 42.0 Total net operating capital 113.3 115.5 117.7 Global Satellite Corp. (GSC) is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements: • GSC currently has a $28.00 million market value of equity and $18.20 million in debt. • The risk-free rate is 5%, there is a 7.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity SL of 12.10%. • GSC's cost of debt is 7.00% at a tax rate of 40%. ⚫. The projections assume that the company will have a post-horizon growth rate of 6.00%. • Current total net operating capital is $110.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $30 million. • The firm does not have any nonoperating assets such as marketable securities. Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis. (Note: Only round intermediate calculations when entering them as a final answer.) Unlevered cost of equity Horizon value of unlevered cash flows Horizon value of tax shield Unlevered value of operations Value of tax shield Value of operations Thus, the total value of GSC's equity is Value ་་
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:4. Merger analysis - Adjusted present value (APV) approach
Wizard Inc., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC will result in an incremental value for
the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company:
Data Collected (in millions of dollars)
Year 1 Year 2
Year 3
EBIT
$14.0
$16.8
$21.0
Interest expense
3.0
3.3
3.6
Debt
33.0
39.0
42.0
Total net operating capital
113.3
115.5
117.7
Global Satellite Corp. (GSC) is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information
about the company and the projected statements:
• GSC currently has a $28.00 million market value of equity and $18.20 million in debt.
• The risk-free rate is 5%, there is a 7.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required
rate of return on equity SL of 12.10%.
• GSC's cost of debt is 7.00% at a tax rate of 40%.
⚫. The projections assume that the company will have a post-horizon growth rate of 6.00%.
• Current total net operating capital is $110.0, and the sum of existing debt and debt required to maintain a constant capital structure
at the time of acquisition is $30 million.
• The firm does not have any nonoperating assets such as marketable securities.
Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis. (Note: Only
round intermediate calculations when entering them as a final answer.)
Unlevered cost of equity
Horizon value of unlevered cash flows
Horizon value of tax shield
Unlevered value of operations
Value of tax shield
Value of operations
Thus, the total value of GSC's equity is
Value
་་
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