The financial manager of Company X is evaluating Company Y as apossible acquisition. Company Y is expected to produce annualearnings before interest and taxes P485,000. Depreciation write-off'son Company Y's assets are P120,000 annually. Both companies havea 34% marginal tax rate. If the merger takes place, Company X willassume P1,425,000 of Company Y's long-term liabilities. CompanyX's weighted average cost of capital is 9.25% and Company Y'sweighted average cost of capital is 14.75%. The acquisition will beevaluated as a perpetuity. If Company X acquires Company Y forPI,125,000 in cash, then the estimated change in the combinedwealth of Company X's shareholders will be nearestP433,729 increase.b.10.a.P1,558,729 increase.P379,830 decrease.d.C.P2,207,838 increase.

A wealth of a shareholder is the sum total of the earnings per share and the market price of the…

Answered: The financial manager of Company X is…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The financial manager of Company X is evaluating Company Y as a possible acquisition. Company Y is expected to produce annual earnings before interest and taxes P485,000. Depreciation write-offs on Company Y's assets are Pl20,000 annually. Both companies have a 34% marginal tax rate. If the merger takes place, Company X will assume P1,425,000 of Company Y's long-term liabilities. Company X's weighted average cost of capital is 9.25% and Company Y's weighted average cost of capital is 14.75%. The acquisition will be evaluated as a perpetuity. If Company X acquires Company Y for PI,125,000 in cash, then the estimated change in the combined wealth of Company X's shareholders will be nearest P433,729 increase. b. 10. a. P1,558,729 increase. P379,830 decrease. d. с. P2,207,838 increase. The following information refers to Questions No. 11 and 12: Ebony Corporation has negotiated the acquisition of Ivory Company in an exchange of shares. Under the terms of the merger, the exchange ratio will…
The firm is contemplating the following (base case): Vehicle acquisition cost $ 48,000 Years of useful life (economic life) 1 Tax rate 25% Required rate of return on equity 11% Required return on debt 6% Debt ratio 40% Annual revenues $ 175,000 Operating expenses (excluding depreciation) $ 115,000 1.Depreciate straight-line over the year of useful life, down to $0 over one year. The maximum dividend is paid at year end. Ignore any working capital effects. Capital charge will be based on the assets at the beginning of each year. What is the project's IRR?
The firm is contemplating the following (base case): Vehicle acquisition cost $ 48,000 Years of useful life (economic life) 1 Tax rate 25% Required rate of return on equity 11% Required return on debt 6% Debt ratio 40% Annual revenues $ 175,000 Operating expenses (excluding depreciation) $ 115,000 1.Depreciate straight-line over the year of useful life, down to $0 over one year. The maximum dividend is paid at year end. Ignore any working capital effects. Capital charge will be based on the assets at the beginning of each year. What's the operating margin?
Hahn Textiles has a tax loss carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200,000 per year for each of the next 7 years and a cost of capital of 14.7%. Webster Industries has expected earnings before taxes for the next 7 years as shown in the following table Webster Industries Year Earnings before taxes 1 $78,000 2 $118,000 3 $201,000 4 $298,000 5 $400,000 6 $398,000 7 $499,000 Both Reilly's and Webster's expected earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. Webster has a cost of capital of 14.7%. Both firms are subject to a 38% tax rate on ordinary income. a. The maximum cash price Webster would be willing to pay for Hahn Textiles is ?
Maple Media is considering a proposal to enter a new line of business. In reviewing the proposal, the company's CFO is considering the following facts: 1. The new business will require the company to purchase additional fixed assets that will cost $600,000 at t=0. For tax and accounting purposes, these costs will be depreciated on a straight-line basis over three years. (Annual depreciation will be $200,000 per year at t=1,2,and 3) 2. At the end of three years, the company will get out of the business and will sell the fixed assets at a salvage value of $100,000. 3. The project will require a $50,000 increase in net operating working capital at t=0, which will be recovered at t=3. 4. The Company's marginal tax rate is 35 percent. 5. The new business is expected to generate $2 million in sales each year (at t=1,2, and 3). 6. The operating costs excluding depreciation are expected to be $1.4 million per year. 7. The projects's cost of capital is 12 percent. What is the projects Internal…
JJJCorporation is to be sold off by its shareholders. It currently has market values of debt and of equity at $20,000,000 and $25,000,000 respectively. The effective cost of debt is 12% while the cost of equity is 18%. Several analysts determined three potential acquirers who may be able to synergize with JJJ. The following returns from JJJ depending on the acquirer are as follows:" Acquirer Expected Firm Return G 20% H 24% I 18% Based on the above and assuming that liabilities will be retained by the entity, what is the highest selling price that the shareholders can get from the sale of JJJ?
The firm is contemplating the following (base case): Vehicle acquisition cost $ 48,000 Years of useful life (economic life) 1 Tax rate 25% Required rate of return on equity 11% Required return on debt 6% Debt ratio 40% Annual revenues $ 175,000 Operating expenses (excluding depreciation) $ 115,000 1.Depreciate straight-line over the year of useful life, down to $0 over one year. The maximum dividend is paid at year end. Ignore any working capital effects. Capital charge will be based on the assets at the beginning of each year. Question: Analyze the uncertainty in the sales estimate by…
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The firm is contemplating the following (base case): Vehicle acquisition cost $ 48,000 Years of useful life (economic life) 1 Tax rate 25% Required rate of return on equity 11% Required return on debt 6% Debt ratio 40% Annual revenues $ 175,000 Operating expenses (excluding depreciation) $ 115,000 1.Depreciate straight-line over the year of useful life, down to $0 over one year. The maximum dividend is paid at year end. Ignore any working capital effects. Capital charge will be based on the assets at the beginning of each year. What is the shareholder's total rate of return? Immediately after…
The firm is contemplating the following (base case): Vehicle acquisition cost $ 48,000 Years of useful life (economic life) 1 Tax rate 25% Required rate of return on equity 11% Required return on debt 6% Debt ratio 40% Annual revenues $ 175,000 Operating expenses (excluding depreciation) $ 115,000 1.Depreciate straight-line over the year of useful life, down to $0 over one year. The maximum dividend is paid at year end. Ignore any working capital effects. Capital charge will be based on the assets at the beginning of each year. What is the WACC?
Velcro Saddles is contemplating the acquisition of Skiers’ Airbags Inc. The values of the two companies as separate entities are $42 million and $21 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $610,000 per year in perpetuity. Velcro Saddles considers offering Skiers’ shareholders a 50% holding in Velcro Saddles. The opportunity cost of capital is 10%. a. What is the value of the stock in the merged company held by the original Skiers’ shareholders? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) b. What is the cost of the stock alternative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) c. What is the merger’s NPV under the stock offer? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions…
Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 175 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin three years from now, and grow at 3% a year. In addition the analyst is assuming an after-tax integration cost of 0.25 billion, and taxes of 21%. Assume that the integration cost of 0.25 billion happens right when the merger is completed (year 0). The analyst is using a cost of capital of 9% to value the synergies. Company B’s equity is trading at 4.3 B dollars (market value of equity). Company A is planning to pay a 32% premium for company B. a) Compute the value of the synergy as estimated by the analyst. Please show your calculations. b) Does the estimate of synergies in a) justify the premium that company A offered to company B?

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