4. Merger analysis Adjusted present value (APV) approach Wward Inc., which is considering the acquisition 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/2024/05/6649b1ed58bf4_7086649b1ec80166.jpg)
Transcribed Image Text:
4. Merger analysis Adjusted present value (APV) approach Wward Inc., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $14.0 $16.8 $21.0 Interest expense 3.0 133 3.6 5 Debt 33.0 39.0 42.0 Total net operating capital 1123 115.5 117.7 Global Satellite Corp. (GSC) is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements: GSC currently has a $26.00 million market value of equity and $16.20 millon in debt. The disk-free rate is 5%, there is a 7.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity of 12.10% GSC's cost of debt la 7.00% at a tax rate of 40%. The projections assume that the company will have a post-horizon growth rate of 6.00%, Current total net operating capital is $110.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $30 million. The firm does not have any nonoperating assets such as marketable secundles. Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis. (Note: Only round Intermediate calculations when entering them as a final answer) Unlevered cost of equity Horizon value of unlevened cash flows Horizon value of tax shield Unlevered value of operations Value of tax shield Value of operations Thus, the total value of GSC's equity is Value Suppose Wizard Inc. plans to use more debt in the first few years of the acquisition of Global Satellite Corp. (GSC) Assuming that using more debt will not lead to an increase in bankruptcy costs for Wizard Inc., the interest tax shields and the value of the tax shield in the analysis, will leading to a value of operations of the acquired firm. The APV approach is considered useful for valuing acquisition targets, because the method involves finding the values of the unlevared firm and the interest tax shield separately and then summing those values. Why is it difficult to value certain types of acquisitions using the corporate valuation model? Because the acquisition is usually financed with new debt that will be repaid rapidly, the proportion of debt in the capital structure changes after the acquisition Because the acquisition is usually financed with equity and no new debt, the proportion of debt in the capital structure remains constant after the acquisition 4. Merger analysis Adjusted present value (APV) approach Wward Inc., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $14.0 $16.8 $21.0 Interest expense 3.0 133 3.6 5 Debt 33.0 39.0 42.0 Total net operating capital 1123 115.5 117.7 Global Satellite Corp. (GSC) is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements: GSC currently has a $26.00 million market value of equity and $16.20 millon in debt. The disk-free rate is 5%, there is a 7.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity of 12.10% GSC's cost of debt la 7.00% at a tax rate of 40%. The projections assume that the company will have a post-horizon growth rate of 6.00%, Current total net operating capital is $110.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $30 million. The firm does not have any nonoperating assets such as marketable secundles. Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis. (Note: Only round Intermediate calculations when entering them as a final answer) Unlevered cost of equity Horizon value of unlevened cash flows Horizon value of tax shield Unlevered value of operations Value of tax shield Value of operations Thus, the total value of GSC's equity is Value Suppose Wizard Inc. plans to use more debt in the first few years of the acquisition of Global Satellite Corp. (GSC) Assuming that using more debt will not lead to an increase in bankruptcy costs for Wizard Inc., the interest tax shields and the value of the tax shield in the analysis, will leading to a value of operations of the acquired firm. The APV approach is considered useful for valuing acquisition targets, because the method involves finding the values of the unlevared firm and the interest tax shield separately and then summing those values. Why is it difficult to value certain types of acquisitions using the corporate valuation model? Because the acquisition is usually financed with new debt that will be repaid rapidly, the proportion of debt in the capital structure changes after the acquisition Because the acquisition is usually financed with equity and no new debt, the proportion of debt in the capital structure remains constant after the acquisition
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
Comment on the following statement: A financial projection presents an organizations expected results, given a hypothetical assumption.
-
Making use of Planck's formula, derive the expressions determining the number of photons per i cm 3 of a cavity at a temperature T in the spectral intervals (w, w +dw) and (, + d,).
-
Relationships between financial statement items. Use the following information for USA Movers Inc. for the year ended June 30, 2009, to answer the following questions. Assume that the shareholders...
-
Compare retirement savings plans (Learning Objective 3) Assume that you want to retire early at age 52. You plan to save using one of the fol lowing two strategies: (1) save $3,000 a year in an IRA...
-
Elroy Corporation repurchased 4,000 shares of its own stock for $30 per share. The stock has a par of $10 per share. A month later Elroy resold 900 shares of the treasury stock for $32 per share....
-
Which of the products below is closest to operating in a perfectly competitive industry? Nike shoes Cotton Perdue Chicken Restaurants
-
Draw a flowchart for a program that ask the user to choose a shape, then depending on the chosen shape, the program will ask the user to define its geometry. Then, the area of that shape will be...
-
Angela Lopez owns and manages a consulting firm called Metrix, which began operations on December 1. On December 31, Metrix shows the following selected accounts and amounts for the month of...
-
A home builder is looking for the best place to purchase land to build a new home. He researches 10 areas near him to find the number of homes sold there in the past month. He collects the following...
-
What are some of the characteristics of a firm with a long cash cycle? Is it possible for a firm's cash cycle to be longer than its operating cycle? Need to understand why or why not 3.What are some...
-
Write an equation of the line parallel to x+4y = 0, such that the point (3,5) is on the line. An equation of the line passing through the point (3,5) and parallel to the line x + 4y = 0 is (Type an...
-
Hesen utanges their equipment with Odell for another piece of equipment. In addon New Belgium also pays $15.500 cash to Odell for the exchange. The following information pertains to the asset given...
-
You've developed a trading strategy that can beat the market by 4 . 0 % per year. The annual turnover of your strategy is 2 . 9 times per year. The round - trip trading and tax costs of your strategy...
-
The swap spread is the difference between the swap rate and the equivalent-maturity Treasury bond yield. Explain why a widening swap spread may be a signal of deteriorating economic conditions. Plot...
-
Mendoza Corporation secured authorization from the state for 100,000 shares of $10 par value common stock. It has 80,000 shares issued and 70,000 shares outstanding. On June 5, the board of directors...
-
Rath School Supply Corporation was organized in 20xx. It was authorized to issue 200,000 shares of no-par common stock with a stated value of $5 per share, and 40,000 shares of $100 par value, 6...
-
The amount that will be accumulated in the future when a series of payments is invested and accrues interest until the future time. True/false
![Mobile App Logo](https://dsd5zvtm8ll6.cloudfront.net/includes/images/mobile/finalLogo.png)
Study smarter with the SolutionInn App