10. 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-offson 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 forP1.125,000 in cash, then the estimated change in the combinedwealth of Company X's shareholders will be nearesta.P433,729 increase.b. P1,558,729 increase.C. P379,830 decrease.d. P2,207,838 increase.

Given Data: EBIT of Company Y485000Depreciation of company Y120000Marginal tax rate34%

Answered: The financial manager of Company X is…

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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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?
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