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Raleigh Couriers is analyzing the possible acquisition of Harwich Restaurants. Neither firm has debt. The forecasts of

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Raleigh Couriers is analyzing the possible acquisition of Harwich Restaurants. Neither firm has debt. The forecasts of Raleigh show that the purchase would increase its annual after-tax cash flow by $350,000 indefinitely. The current market value of Harwich is $9 million. The current market value of Raleigh is $23 million. The appropriate discount rate for the incremental cash flows is 8 percent. Raleigh is trying to decide whether it should offer 25 percent of its stock or $12 million in cash to Harwich.

a. What is the synergy from the merger?

b. What is the value of Harwich to Raleigh?

c. What is the cost to Raleigh of each alternative?

d. What is the NPV to Raleigh of each alternative?

e. Which alternative should Raleigh use?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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a The synergy will be the present value of the incremental cash flows of the proposed purc...View the full answer


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Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-0071051606

8th Canadian Edition

Authors: Stephen A. Ross, Randolph W. Westerfield

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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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