The following information refers to Questions No. 13 through 15:The financial manager of Apple Co. is evaluating Banana Co. as a possibleacquisition. Banana Co. is expected to produce annual after-tax operatingcash flows of PI,500,000. Apple Co. will assume P1,000,000 of BananaCo.'s long-term liabilities. Apple Co.'s weighted average cost of capital is12% and Banana Co.'s weighted average cost of capital is 15%. Theacquisition will be evaluated as a perpetuity. Apple Co.'s common stock istrading at P25 per share with 1,000,000 shares outstanding and a P/E ratio of10. Banana Co.'s stock is trading at P15 per share with 600,000 sharesoutstanding and a P/E ratio of 15.Based on this information, the estimated market value of the target-company is nearestP 9,000,000.b.13.a.P10,000,000.P11,000,000.P11,500,000.с.d.

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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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Hastings Corporation is interested in acquiring Vandell Corporation. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.3 million, $2.9 million, $3.4 million, and $3.79 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell’s $10.29 million in debt (which has a 7.4% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.6 million each year for Years 1, 2, and 3. After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.431 million, after which the interest and the tax shield will grow at 5%. Vandell currently has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.10 (i.e., based on its target capital structure). Vandell and Hastings each have a…

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