RTE Telecom Inc., which is considering the acquisition of Lucky Coro, estimates that acquiring Lucky 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 $120 $14.4 $18.0 Interest expense 505560 Debt 29.7 35.1 37.8 Total net operating capital 109.2 111.3 1134) Lucky Corp is a pubicly traded company, and its market- determined pre-merger beta is 1.20 You also have the following information about the company and the projected statements: Lucky currently has a $12.00 million market value of equity and S 7:80 million in debt. The risk-free rate is 3.5%, there is a 5.60% market risk premium, and the Capital Asset Pricing Model produces a pre merger required rate of return on equity rs of 10.22% Lucky's cost of debt is 5.50% al a laxtale of 35% The projections assume that the company will have a post-honzon growth rate of 4.50% Current total net operating capital & S106.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $27 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) Value 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 Lucky! s equity is. Suppose RTE Telecom Inc. plans to use more debt in the first few years of the acquisition of Lucky Corp. Assuming that using more debt will not lead to an increase in bankruptcy costs for RTE Telecom Inc., the interest tax shields and the value of the tax shield in the analysis, will leading to a value of operations of the acquired firm. The APV approach is considered useful for valuing acqusition targets, because the method involves finding the values of the unlevered firm and the interest tax shield separately and then summing those values. Why is it difficult to value certain types of acquisitions using the corporate valuation model? 1. The acquiring firm usually assumes the debt of the target firm. Thus, old debt with different coupon rates usually becomes a part of the acquisition deal. 2. The acquiring firm immediately retires the target fins old cebt. Thus, the acquisition deal consists of only new debt in its capital structure
RTE Telecom Inc., which is considering the acquisition of Lucky
Coro, estimates that acquiring Lucky 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 $120 $14.4 $18.0 Interest expense 505560 Debt 29.7 35.1 37.8 Total net operating capital 109.2 111.3 1134) Lucky Corp is a pubicly traded company, and its market- determined pre-merger beta is 1.20 You also have the following information about the company and the projected statements: Lucky currently has a $12.00 million market value of equity and S 7:80 million in debt. The risk-free rate is 3.5%, there is a 5.60% market risk premium, and the
of the unlevered firm and the interest tax shield separately and then
summing those values. Why is it difficult to value certain types of
acquisitions using the corporate valuation model? 1. The acquiring
firm usually assumes the debt of the target firm. Thus, old debt with
different coupon rates usually becomes a part of the acquisition
deal. 2. The acquiring firm immediately retires the target fins old
cebt. Thus, the acquisition deal consists of only new debt in its
capital structure
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