Cake World is considering purchasing a competitor, Cupcake. Projected cash flows as a result of the merger are: Year1, P1,450,000; Year2, P1,750,000; Year3, P2,000,000; Year4, P2,500,000. In addition, Cupcake's year4 cashflows are expected to grow at a constant rate of 6% after year 4. Cupcake's post merger beta is estimated to be 1.2 and its post-merger tax rate is 40%. The risk-free rate is 8% and the market risk premium is 4%. Compute for the maximum bid price that Cake World can offer in the acquisition.

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
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Cake World is considering purchasing a competitor, Cupcake. Projected cash flows as a result of the merger are: Year1, P1,450,000; Year2, P1,750,000; Year3, P2,000,000; Year4, P2,500,000. In addition, Cupcake's year4 cashflows are expected to grow at a constant rate of 6% after year 4. Cupcake's post merger beta is estimated to be 1.2 and its post-merger tax rate is 40%. The risk-free rate is 8% and the market risk premium is 4%. Compute for the maximum bid price that Cake World can offer in the acquisition.

Cake World is considering purchasing a competitor, Cupcake. Projected cash flows as
a result of the merger are: Year1, P1,450,000; Year2, P1,750,000; Year3, P2,000,000;
Year4, P2,500,000. In addition, Cupcake's year4 cashflows are expected to grow at a
constant rate of 6% after year 4. Cupcake's post merger beta is estimated to be 1.2
and its post-merger tax rate is 40%. The risk-free rate is 8% and the market risk
premium is 4%. Compute for the maximum bid price that Cake World can offer in the
acquisition. *
Transcribed Image Text:Cake World is considering purchasing a competitor, Cupcake. Projected cash flows as a result of the merger are: Year1, P1,450,000; Year2, P1,750,000; Year3, P2,000,000; Year4, P2,500,000. In addition, Cupcake's year4 cashflows are expected to grow at a constant rate of 6% after year 4. Cupcake's post merger beta is estimated to be 1.2 and its post-merger tax rate is 40%. The risk-free rate is 8% and the market risk premium is 4%. Compute for the maximum bid price that Cake World can offer in the acquisition. *
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