Stubborn Motors, Inc., is asking a price of $87 million to be purchased by Rubber Tire Motor Corp. Stubborn Motors currently has total cash flows of $2 million that are expected to grow indefinitely by 1 percent annually. Managers estimate that, because of synergies, the merged firm's cash flows will increase by $5 million in the first year after the merger and that these cash flows will grow by an additional 5 percent in years 2 through 4 following the merger. After the first four years, these incremental cash flows will grow at a rate of 1 percent annually. The WACC for the merged firms is 12 percent. Calculate the NPV of the merger. (Enter your answer in millions. Negative amount should be indicated by a minus sign. Do not round Intermediate calculations and round your final answer to 2 decimal places.) NPV Should Rubber Tire Motor Corporation agree to acquire Stubborn Motors for the asking price of $87 million? O Yes O No m
Stubborn Motors, Inc., is asking a price of $87 million to be purchased by Rubber Tire Motor Corp. Stubborn Motors currently has total cash flows of $2 million that are expected to grow indefinitely by 1 percent annually. Managers estimate that, because of synergies, the merged firm's cash flows will increase by $5 million in the first year after the merger and that these cash flows will grow by an additional 5 percent in years 2 through 4 following the merger. After the first four years, these incremental cash flows will grow at a rate of 1 percent annually. The WACC for the merged firms is 12 percent. Calculate the NPV of the merger. (Enter your answer in millions. Negative amount should be indicated by a minus sign. Do not round Intermediate calculations and round your final answer to 2 decimal places.) NPV Should Rubber Tire Motor Corporation agree to acquire Stubborn Motors for the asking price of $87 million? O Yes O No m
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
Problem 1PS
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Transcribed Image Text:Stubborn Motors, Inc., is asking a price of $87 million to be purchased by Rubber Tire
Motor Corp. Stubborn Motors currently has total cash flows of $2 million that are
expected to grow indefinitely by 1 percent annually. Managers estimate that, because of
synergies, the merged firm's cash flows will increase by $5 million in the first year after
the merger and that these cash flows will grow by an additional 5 percent in years 2
through 4 following the merger. After the first four years, these incremental cash flows
will grow at a rate of 1 percent annually. The WACC for the merged firms is 12 percent.
Calculate the NPV of the merger. (Enter your answer in millions. Negative amount
should be Indicated by a minus sign. Do not round Intermediate calculations and
round your final answer to 2 decimal places.)
NPV
Should Rubber Tire Motor Corporation agree to acquire Stubborn Motors for the asking
price of $87 million?
O Yes
O No
m
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