Velcro Saddles is contemplating the acquisition of Skiers' Airbags Incorporated The values of the two companies as separate entitiesare $30 million and $15 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketingand administrative costs by $550,000 per year in perpetuity. Velcro Saddles considers offering Skiers' shareholders a 50% holding inVelcro 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?Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.b. What is the cost of the stock alternative?Note: 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?Note: A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer inmillions rounded to 2 decimal places.Answer is complete but not entirely correct.S 25.25 millionS 13.00 millionS5.50 milliona. Value of the stockb. Cost of the stockc. NPV

Net present value is computed by deducting the present value of cash outflows from the present value…

Answered: Velcro Saddles is contemplating the…

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

See similar textbooks

Similar questions

In 2012, the Campbell Soup Company acquired Bolthouse Farms for $1.55 billion. This acquisition increased the level of vertical integration in Campbell, as Bolthouse Farms owned and operated extensive farming operations where it produced many food items used in Campbell's products. Suppose that the value of produce provided by these farms after the acquisition would be $85 million per year for Campbell and that, in addition, Campbell could save $5 million per year in costs it would otherwise spend in searching for and negotiating over equivalent produce. However, the transaction cost of the acquisition (lawyers' fees, re-locating some production facilities, paying severance to unnecessary employees, etc.) required a one-time payment of $50 million. Assume that Campbell receives the produce related benefits in perpetuity. If the interest rate used to discount future earnings is 5%, what is the present value of net benefits to Campbell? The present value (PV) of net benefits to Campbell…
You are contemplating the purchase of a one-half interest in a corporate airplane to facilitate the expansion of your business into two new geographic areas. The acquisition would eliminate about $220,000 in estimated annual expenditures for commercial flights, mileage reimbursements, rental cars, and hotels for each of the next 10 years. The total purchase price for the half-share is $6 million, plus associated annual operating costs of $100,000. Assume the plane can be fully depreciated on a straight-line basis for tax purposes over 10 years. The company’s weighted average cost of capital (commonly referred to as WACC) is 8%, and its corporate tax rate is 40%. Does this endeavor present a positive or negative net present value (NPV)? If positive, how much value is being created for the company through the purchase of this asset? If negative, what additional annual cash flows would be needed for the NPV to equal zero? To what phenomena might those additional positive cash flows be…
Systems has 6.45 billion shares outstanding and a share price of $17.25. Quisco is considering developing a new networking product in-house at a cost of $497 million. Alternatively, Quisco can acquire a firm that already has the technology for $899 million worth (at the current price) of Quisco stock. Suppose that absent the expense of the new technology, Quisco will have EPS of $0.828. a. Suppose Quisco develops the product in-house. What impact would the development cost have onQuisco's EPS? Assume all costs are incurred this year and are treated as an R&D expense, Quisco's tax rate is 40 %, and the number of shares outstanding is unchanged. b. Suppose Quisco does not develop the product in-house but instead acquires the technology. What effect would the acquisition have on Quisco's EPS this year? (Note that acquisition expenses do not appear directly on the income statement. Assume the firm was acquired at the start of the year and has no revenues or expenses of its own, so that the…
JBL Co. has designed a new conveyor system. Management must choose among three alternative courses of action: (1) The firm can sell the design outright to another corporation with payment over 2 years. (2) It can license the design to another manufacturer for a period of 5 years, its likely product life. (3) It can manufacture and market the system itself; this alternative will result in 6 years of cash inflows. The company has a cost of capital of 11.4%.Cash flows associated with each alternative are as shown in the following table. Alternative Sell License Manufacture Initial investment (CF0) $199,000 $200,600 $449,000 Year (t ) Cash inflows (CFt) 1 $199,500 $250,600 $200,300 2 250,400 100,700 255,000 3 — 79,700 200,300 4 — 59,700 200,300 5 — 40,500 200,300 6 — —…
The WACC is used as the discount rate to evaluate various capital budgeting projects. However, it is important to realize that the WACC is an appropriate discount rate only for a project of average risk. Analyze the cost of capital situations of the following company cases, and answer the specific questions that finance professionals need to address. Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 8.2%, and its cost of preferred stock is 9.3%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. However, if it is necessary to raise new common equity, it will carry a cost of 14.2%. If its current tax rate is 25%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through…
(Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries owned by the Rosewood Corporation for $370 million. Since the primary asset of this business is real estate, Templeton's management has determined that they will be able to borrow the majority of the money needed to buy the business. The Rosewood Corporation has no debt financing, but Templeton plans to borrow $90 million and invest only $280 million in equity in the acquisition. What weights should Templeton use for debt and equity in computing the WACC for this acquisition? .... The appropriate weight of debt, w, is%. (Round to one decimal place.)
Lululemon wants to enter the electric car business. To enter the business, Lululemon will need to make an initial investment of $100 million into purchases of production facilities and equipment. The production facilities and equipment are expected to have a ten-year life and will be depreciated on a straight-line basis over that period, so that the book value of the production facilities and equipment equals zero at the end of year ten. Lululemon plans to operate the business only for six years, after which Lululemon plans to sell its production facilities and equipment for $60 million. For the six years that Lululemon expects to operate in the electric car business,Lululemon expects to generate cash revenues of $140 million in the first year, which Lululemon expects to grow at a rate of 5% each year after the first year. The cash operating costs of running the electric car business, excluding depreciation expenses, are expected to be 35% of revenues. Lululemon expects an increase in…
Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 85 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin two years from now, and grow at 2.5% a year. In addition the analyst is assuming an after-tax integration cost of 0.1 billion, and taxes of 20%. Assume that the integration cost of 0.1 billion happens one year after the merger is completed (year 1). The analyst is using a cost of capital of 10% to value the synergies. Company B’s equity is trading at 2.3 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. b) does the estimate of synergies justify the premium? Could you show me how to work this out in an excel sheet?
Ivanhoe Company is considering these two alternatives for financing the purchase of a fleet of airplanes: 1. 2. Issue 52,500 shares of common stock at $44 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) Issue 10%, 10-year bonds at face value for $2,310,000. It is estimated that the company will earn $809,200 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 92,000 shares of common stock outstanding prior to the new financing. Determine the effect on net income and earnings per share for (a) issuing stock and (b) issuing bonds. Assume the new shares or new bonds will be outstanding for the entire year. (Round earnings per share to 2 decimal places, e.g. 2.66.) O î (a) Plan One Issue Stock $ (b) Plan Two Issue Bonds
Softek Corporation forms a separate legal entity, Startek, to develop new technology. The entity is funded by $2,000,000 in outside equity and $26,000,000 in debt. Softek guarantees Startek's debt. The entity is expected to generate the following cash flows at the end of two years: Cash Flow Probability $14,520,000 0.50 42,350,000 0.20 60,500,000 0.30 A discount rate of 10 percent is appropriate. Required Assume qualitative analysis of Startek's VIE status is inconclusive. Quantitatively analyze whether Startek is a variable interest entity. Instructions: Use negative signs with your answers, when appropriate. • Enter $ answers in millions ($11,000,000 equals $11 million). • Enter Probability answers using decimals. Expected Present Cash Flow Value Probability Expected Investment Residual Expected Fair Value Returns S PV Gains $ $ Expected Losses
RiverRocks (whose WACC is 12.7%) is considering an acquisition of Raft Adventures (whose WACC is 15.3%). The purchase will cost $100.5 million and will generate cash flows that start at $14.1 million in one year and then grow at 4.2% per year forever. What is the NPV of the acquisition? The net present value of the project is $ million. (Round to two decimal places.)
Cullumber Company is considering these two alternatives for financing the purchase of a fleet of airplanes. 1. Issue 63,000 shares of common stock at $48 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2. Issue 13%, 15-year bonds at face value for $3,024,000. It is estimated that the company will earn $825,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 40% and has 94,100 shares of common stock outstanding prior to the new financing.Determine the effect on net income and earnings per share for issuing stock and issuing bonds. Assume the new shares or new bonds will be outstanding for the entire year. (Round earnings per share to 2 decimal places, e.g. $2.66.)

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS