5. F Corporation is considering the acquisition of T Corporation. Without the merger, T Corporation’s cash flow to capital is expected to be $6 million next year and is expected to grow at a constant 4 percent a year thereafter. With a merger, T Corporation’s constant growth rate will be increased to 6 percent. The tax rate is 40 percent and the after-tax required return is 10 percent. Assume year-end cash flows.

a. What is the value of T’s capital if T is not acquired by F Corporation?

b. What is the value of T’s capital if T is acquired by F Corporation?

Answer rating: 100% (QA)

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