5. Merger analysis - Adjusted present value (APV) approach RTE Telecom Inc., which is considering the...

 

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5. Merger analysis - Adjusted present value (APV) approach RTE Telecom Inc., which is considering the acquisition of Dual Purposes Products Co. (DPP), estimates that acquiring DPP 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 $20.0 $24.0 $30.0 Interest expense 4.0 4.4 4.8 Debt 30.8 36.4 39.2 Total net operating capital 117.4 119.7. 122.0 Dual Purposes Products Co. (DPP) is a publicly traded company, and its market-determined pre-merger beta is 1.60. You also have the following information about the company and the projected statements: • DPP currently has a $34.00 million market value of equity and $22.10 million in debt. • The risk-free rate is 4%, there is a 6.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity ISL. of 13.76%. • DPP's cost of debt is 6.00% at a tax rate of 40%. • The projections assume that the company will have a post-horizon growth rate of 5.00%. • Current total net operating capital is $114.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $28 million. • The firm does not have any nonoperating assets such as marketable securities. Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis: (Note: Round your answers to two decimal places, but do not round intermediate calculations.) Unlevered cost of equity Horizon value of unlevered cash flows Horizon value of tax shield Unlevered value of operations Value of tax shield Value of operations Thus, the total value of DPP's equity is Value ▼ Suppose RTE Telecom Inc. plans to use more debt in the first few years of the acquisition of Dual Purposes Products Co. (DPP) Assuming that using more debt will not lead to an increase in bankruptcy costs for RTE Telecom 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. 5. Merger analysis - Adjusted present value (APV) approach RTE Telecom Inc., which is considering the acquisition of Dual Purposes Products Co. (DPP), estimates that acquiring DPP 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 $20.0 $24.0 $30.0 Interest expense 4.0 4.4 4.8 Debt 30.8 36.4 39.2 Total net operating capital 117.4 119.7. 122.0 Dual Purposes Products Co. (DPP) is a publicly traded company, and its market-determined pre-merger beta is 1.60. You also have the following information about the company and the projected statements: • DPP currently has a $34.00 million market value of equity and $22.10 million in debt. • The risk-free rate is 4%, there is a 6.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity ISL. of 13.76%. • DPP's cost of debt is 6.00% at a tax rate of 40%. • The projections assume that the company will have a post-horizon growth rate of 5.00%. • Current total net operating capital is $114.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $28 million. • The firm does not have any nonoperating assets such as marketable securities. Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis: (Note: Round your answers to two decimal places, but do not round intermediate calculations.) Unlevered cost of equity Horizon value of unlevered cash flows Horizon value of tax shield Unlevered value of operations Value of tax shield Value of operations Thus, the total value of DPP's equity is Value ▼ Suppose RTE Telecom Inc. plans to use more debt in the first few years of the acquisition of Dual Purposes Products Co. (DPP) Assuming that using more debt will not lead to an increase in bankruptcy costs for RTE Telecom 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.

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