Company HH is a regional hardware chain which is considering acquiring LL. The boss of the company asked to place a value on target. There are 20 million shares @$12 per share with LL. Bet is 1.25 for LL’s stock with risk free rate 5.5% and market risk premium is 4%. 20% of capital structure of LL is financed with debt with 8% interest rate. Federal plus state tax rate is 25% and will remain same even after acquisition. The management of the company HH is asking various questions about mergers and also asking to perform merger analysis based on the given details of Company LL. To compute: The values of unlevered horizon, current unlevered operating value, horizon value of interest tax savings, current value of interest tax saving. Also, state that the values will be same or different if other firm evaluates the LL’s value.

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Chapter 22, Problem 1MC

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Case summary: Company HH is a regional hardware chain which is considering acquiring LL. The boss of the company asked to place a value on target. There are 20 million shares @$12 per share with LL. Bet is 1.25 for LL’s stock with risk free rate 5.5% and market risk premium is 4%. 20% of capital structure of LL is financed with debt with 8% interest rate. Federal plus state tax rate is 25% and will remain same even after acquisition. The management of the company HH is asking various questions about mergers and also asking to perform merger analysis based on the given details of Company LL.

To compute: The values of unlevered horizon, current unlevered operating value, horizon value of interest tax savings, current value of interest tax saving. Also, state that the values will be same or different if other firm evaluates the LL’s value.

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