Company A with excess cash is considering the acquisition of company B. Company A estimates of...
Fantastic news! We've Found the answer you've been seeking!
Question:
![image text in transcribed](https://s3.amazonaws.com/si.experts.images/answers/2024/05/6646906d8a39d_5256646906d65707.jpg)
Transcribed Image Text:
Company A with excess cash is considering the acquisition of company B. Company A estimates of B's earnings potential if it comes under A's management (in millions of dollars). The interest expense listed here includes the interest (1) on B's existing debt, (2) on new debt that A would issue to help finance the acquisition, and (3) on new debt expected to be issued over time to help finance expansion within the new "B division," the code name given to the target firm. The retentions represent earnings that will be reinvested within the B division to help finance its growth. Company B currently uses 35% debt financing, and it pays federal-plus-state taxes at a 35% rate. Security analysts estimate B's beta to be 1.36. If the acquisition were to take place, A's would increase B's debt ratio to 40%, which would increase B's beta to 1.48. Further, because company A is highly profitable, taxes on the consolidated firm would be 40%. Depreciation cash flows would have to be reinvested within the division to replace worn-out equipment. You estimate the risk-free rate to be 4% and the market risk premium to be 8%. You also estimate that cash flows after 2021 will grow at a constant rate of 6%. The after tax cost of debt is 7%. The table presents estimates of the company B's data for merger analysis. Net Sales COGS 2018 2019 60,000,000 80,000,000 30,000,000 50,000,000 2020 2021 100,000,000 130,000,000 75,000,000 92,000,000 ebapps/assessment/review/review.jsp?attempt_id=_981165_1&course_id=_6530_1&content_id=_435364_1&outcome_id=_936 Review Test Submission: Final Exam-201740 Summer III ... Selling & Admin 4,000,000 6,000,000 8,000,000 9,000,000 Expenses Interest 2,000,000 3,000,000 4,000,000 5,000,000 Expense Necessary 2,000,000 7,000,000 9,000,000 8,000,000 Retained Earnings What is the cash flow for year 2021 (The cash flow to be used for merger analysis)? Selected Answer: 68,247,308.24 Answers: 75,343,089.43 18,400,000 55,369,178.47 15,400,000 68,247,308.24 Company A with excess cash is considering the acquisition of company B. Company A estimates of B's earnings potential if it comes under A's management (in millions of dollars). The interest expense listed here includes the interest (1) on B's existing debt, (2) on new debt that A would issue to help finance the acquisition, and (3) on new debt expected to be issued over time to help finance expansion within the new "B division," the code name given to the target firm. The retentions represent earnings that will be reinvested within the B division to help finance its growth. Company B currently uses 35% debt financing, and it pays federal-plus-state taxes at a 35% rate. Security analysts estimate B's beta to be 1.36. If the acquisition were to take place, A's would increase B's debt ratio to 40%, which would increase B's beta to 1.48. Further, because company A is highly profitable, taxes on the consolidated firm would be 40%. Depreciation cash flows would have to be reinvested within the division to replace worn-out equipment. You estimate the risk-free rate to be 4% and the market risk premium to be 8%. You also estimate that cash flows after 2021 will grow at a constant rate of 6%. The after tax cost of debt is 7%. The table presents estimates of the company B's data for merger analysis. Net Sales COGS 2018 2019 60,000,000 80,000,000 30,000,000 50,000,000 2020 2021 100,000,000 130,000,000 75,000,000 92,000,000 ebapps/assessment/review/review.jsp?attempt_id=_981165_1&course_id=_6530_1&content_id=_435364_1&outcome_id=_936 Review Test Submission: Final Exam-201740 Summer III ... Selling & Admin 4,000,000 6,000,000 8,000,000 9,000,000 Expenses Interest 2,000,000 3,000,000 4,000,000 5,000,000 Expense Necessary 2,000,000 7,000,000 9,000,000 8,000,000 Retained Earnings What is the cash flow for year 2021 (The cash flow to be used for merger analysis)? Selected Answer: 68,247,308.24 Answers: 75,343,089.43 18,400,000 55,369,178.47 15,400,000 68,247,308.24
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
James has $15,000 in his saving account now. (a) What is the amount he deposited one year ago in his saving account if the account has a rate of return of 10%? (b) Calculate the earned amount of...
-
What is an informal value transfer system (IVTS), and what role has it played in money laundering?
-
Penn Company was formed on July 1, 2010. It was authorized to issue 300,000 shares of $10 par value common stock and 100,000 shares of 8% $25 par value, cumulative and nonparticipating preferred...
-
A distillation column with \(6.0 \mathrm{ft}\) of packing can be operated as a stripper with liquid feed, as an enricher with vapor feed, or at total reflux. We are separating methanol from...
-
Use the information in Exercise 1-14 to prepare an October 31 statement of cash flows for Real Answers. In Exercise 1-14, On October 1, Keisha King organized Real Answers, a new consulting firm; on...
-
A resident has requested that the Moving company assist in preparing their unit and moving all items to the center of the rooms. You received a call from the moving company that they had an emergency...
-
Jordyn is single. She purchased her first home for $ 1 8 0 , 0 0 0 in 2 0 1 8 . It served as her primary residence until she sold it on November 1 , 2 0 2 2 for $ 4 4 0 , 0 0 0 . She paid a $ 2 6 , 4...
-
What sort of trade-offs do governments face if a decision was being considered to reduce the level of welfare benefits as part of a market-orientated supply-side policy?
-
Can the doom loop ever be broken?
-
What determines the slope of the IS curve? What determines the slope of the LM curve? In relation to your answer to these questions, explain why these determinants can be a source of disagreement...
-
Populist movements have been said to reflect the will of the people. Economists such as Kenneth Arrow and theories like the median voter theorem along with the ideas of French political economist the...
-
Why might governments find it difficult to accurately measure the size of the output gap?
-
Frontier Corp. sells units for $40, has unit variable costs of $12, and fixed costs of $133,000. Frontier sells 10,000 units. If sales increase 24%, by how much will profits increase?r Multiple...
-
CLASS PERIO Solving Linear Equations: Variable on Both Sides Solve each equation. 1) 6r+ 7 = 13 + 7r 3) -7x-3x+2=-8x-8 5)-14 +66+7-26=1+5b 7) n-3n = 14-4n 2) 13-4x=1-x 4)-8-x= x - 4x 6)n+2=-14-n 8)...
-
A column arrangement similar to Figure \(15-2\) is used for organic liquids. A large reservoir of water is under the column. The water is stirred and solute concentration in the water is constant....
-
For the same system as in Problem 15.D1, the high concentration \(\mathrm{C}_{\mathrm{A}, 0}=1.2 \mathrm{~kg} / \mathrm{m}^{3}\) and \(\mathrm{C}_{\mathrm{A}, \mathrm{L}}=0.9701 \mathrm{~kg} /...
-
What is the Fickian diffusivity of chlorobenzene in liquid bromobenzene at \(300 \mathrm{~K}\) when the mole fraction of chlorobenzene is 0.0332 ? Assume that the diffusivity follows an Arrhenius...
![Mobile App Logo](https://dsd5zvtm8ll6.cloudfront.net/includes/images/mobile/finalLogo.png)
Study smarter with the SolutionInn App