BigCo is buying LittleCo. They are paying 70% in cash, 30% in equity. The tax rate is
Question:
BigCo is buying LittleCo. They are paying 70% in cash, 30% in equity. The tax rate is 40%.
a- LittleCo has a levered cost of equity of 19%. They bring in $300,000 in EBIT per year and pay $75,000 per year in interest. Five years from now, they will receive a one-time payment of $900,000. What is the value of their equity?
b- BigCo currently produces $850,000 per year in net income and has a levered cost of equity of 16%. After the merger, BigCo will gain access to LittleCo’s risk management expertise and the appropriate discount rate for these cash flows will drop to 13%. What is the PV of this synergy?
c- If BigCo promises LittleCo’s shareholders one third of the synergies and BigCo currently has 10,000 shares outstanding, how many shares should LittleCo’s shareholders receive as part of their payment?
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill