Stubborn Motors, Inc. is asking a price of $75 million to be purchased by Rubber Tire Motor Corp. Stubborn Motors currently has total cash flows of $2 million that are expected to grow indefinitely by one percent annually. Managers estimate that because of synergies the merged firm’s cash flows will increase by $4 million the first year after the merger and these cash flows will grow by an additional 4 percent in years 2 through 4 following the merger. After the first four years, these incremental cash flows will grow at a rate of 1 percent annually. The WACC for the merged firms is 10 percent. Calculate the NPV of the merger. Should Rubber Tire Motor Corporation agree to acquire Stubborn Motors for the asking price of $75 million?

  • CreatedSeptember 23, 2014
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