Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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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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J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $4,200,000. Patterson will provide the following
pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carryforward. Use Appendix D as an
approximate answer, but calculate your final answer using the formula and financial calculator methods.
Cash inflow (aftertax)
Synergistic benefits (aftertax)
1 to 5
$ 460,000
42,000
Years
6 to 15
$ 620,000
62,000
16 to 20
$ 820,000
72,000
The cost of capital for the acquiring firm is 11 percent.
a. Compute the net present value.
Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2
decimal places.
es
Net present value
b. Should the merger be undertaken?
Yes
No
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Chapter 20 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
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