Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Chapter 20, Problem 3P
Summary Introduction
To calculate:Â The NPV of the merger and whether the merger should be undertaken or not.
Introduction:
Merger:
An agreement between two existing companies that combines them to form one company is termed as a merger. This is done for the expansion of business, its share in the market and value of shareholders.
Synergistic benefits:
Synergistic benefits arise out of a merger of two or more entities, which in a basic term meaning that the performance and value of the combined entity will be more than those of the individual separate entities.
It is the difference between the PV (present value) of
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Estefan Industies has a new project available that requires an initial investment of sex million. The project will provide unlevered cash flows of $925,000 per year for the next 20 years. The company will finance the project with a debt-value ratio of 35. The company's bonds have a YTM of 5.9 percent. The companies with operations comparable to this project have unlevered betas of 1.09, 1.17, 1.28, and 1.20. The risk-free rate is 3.6 percent, and the market risk premium is 7 percent. The tax rate is 21 percent. What is the NPV of this project?
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