The appropriate discount rate for valuing the acquisition. Introduction: A merger is the mix of two organizations into one by either shutting the old entities into one new entity or by one organization engrossing the other. In other terms, at least two organizations are united into one organization to form a merger.

Question

RTE Telecom Inc., which is considering the acquisition of Lucky Coro, estimates that acquiring Lucky will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $120 $14.4 $18.0 Interest expense 505560 Debt 29.7 35.1 37.8 Total net operating capital 109.2 111.3 1134) Lucky Corp is a pubicly traded company, and its market- determined pre-merger beta is 1.20 You also have the following information about the company and the projected statements: Lucky currently has a $12.00 million market value of equity and S 7:80 million in debt. The risk-free rate is 3.5%, there is a 5.60% market risk premium, and the Capital Asset Pricing Model produces a pre merger required rate of return on equity rs of 10.22% Lucky's cost of debt is 5.50% al a laxtale of 35% The projections assume that the company will have…

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Question

Chapter 21, Problem 6P

a.

Summary Introduction

To Determine: The appropriate discount rate for valuing the acquisition.

Introduction: A merger is the mix of two organizations into one by either shutting the old entities into one new entity or by one organization engrossing the other. In other terms, at least two organizations are united into one organization to form a merger.

b.

Summary Introduction

To Determine: The continuing value.

c.

Summary Introduction

To Determine: The value of Company GC to Company TCI .

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RTE Telecom Inc., which is considering the acquisition of Lucky Coro, estimates that acquiring Lucky will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $120 $14.4 $18.0 Interest expense 505560 Debt 29.7 35.1 37.8 Total net operating capital 109.2 111.3 1134) Lucky Corp is a pubicly traded company, and its market- determined pre-merger beta is 1.20 You also have the following information about the company and the projected statements: Lucky currently has a $12.00 million market value of equity and S 7:80 million in debt. The risk-free rate is 3.5%, there is a 5.60% market risk premium, and the Capital Asset Pricing Model produces a pre merger required rate of return on equity rs of 10.22% Lucky's cost of debt is 5.50% al a laxtale of 35% The projections assume that the company will have…

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