Financial Management: Theory & Practice
15th Edition
ISBN: 9781337248006
Author: Eugene F. Brigham; Michael C. Ehrhardt
Publisher: Cengage Learning US
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Chapter 22, Problem 5MC
Summary Introduction
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 appropriate discount rate applied in previous part. Estimate the actual discount rate.
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