Company HH is a regional hardware chain which is considering acquiring LL. The boss of the company asked to place a value on target. Interest is included in existing debt of $55 million @9% in LL and new debt will be issued after some time to help the expansion with respect to finance with in the new L division. If it is acquired, then the Company LL will face 40% of tax. Beta will be 1.3 for LL’s stock with risk free rate 7% and market risk premium is 4%. The acquisition will not change the LL company’s structure it will remain at 20% debt. Person Z estimates that after 2020 the company will grow at 6%. 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 determine: The steps using compressed APV (Adjusted present value ) approach in valuing merger.

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Chapter 22, Problem 3MC

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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.

Interest is included in existing debt of $55 million @9% in LL and new debt will be issued after some time to help the expansion with respect to finance with in the new L division. If it is acquired, then the Company LL will face 40% of tax.

Beta will be 1.3 for LL’s stock with risk free rate 7% and market risk premium is 4%.

The acquisition will not change the LL company’s structure it will remain at 20% debt.

Person Z estimates that after 2020 the company will grow at 6%.

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 determine: The steps using compressed APV (Adjusted present value) approach in valuing merger.

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