Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337671002
Author: Brigham
Publisher: Cengage
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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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4. Merger analysis - Adjusted present value (APV) approach
Wizard Inc., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC 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
$14.0
$16.8
$21.0
Interest expense
3.0
3.3
3.6
Debt
33.0
39.0
42.0
Total net operating capital
113.3
115.5
117.7
Global Satellite Corp. (GSC) is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information
about the company and the projected statements:
• GSC currently has a $28.00 million market value of equity and $18.20 million in debt.
• The risk-free rate is 5%, there is a 7.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required
rate of return on equity SL of 12.10%.
•…
Tax effects of acquisition Trapani Tool Company is evaluating the acquisition of Sussman Casting. Sussman has a tax loss carryforward of $1.8 million. Trapani can purchase Sussman for $2.1 million. It can sell the assets for $1.6 million, their book value. Trapani expects its earnings before taxes in the 5 years after the merger to be as shown in the following table.
The expected earnings given are assumed to fall within the annual limit that is legally allowed for application of the tax loss carryforward resulting from the proposed merger (see footnote 2). Trapani is in the 21% tax bracket.
Calculate the firm’s tax payments and earnings after taxes for each of the next 5 years without the merger.
Calculate the firm’s tax payments and earnings after taxes for each of the next 5 years with the merger.
What are the total benefits associated with the tax losses from the merger? (Ignore present value.)
Discuss whether you would recommend the proposed merger. Support your decision with…
Required:
Should Gwapo Co. proceed with the acquisition of Beauty Co.?
Chapter 21 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 21 - Prob. 1QCh. 21 - Prob. 2QCh. 21 - Prob. 3QCh. 21 - In the spring of 1984, Disney Productions stock...Ch. 21 - Prob. 5QCh. 21 - VALUATION Visscher currently expects to pay a...Ch. 21 - MERGER VALUATION Hastings estimates that if it...Ch. 21 - MERGER BID On the basis of your answers to...Ch. 21 - Prob. 4PCh. 21 - CAPITAL BUDGETING ANALYSIS The Stanton Stationery...
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