5. Merger analysis - Adjusted present value (APV) approach Wizard Inc., which is considering the acquisition of Exteter Enterprise Inc., estimates that acquiring Exteter 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 3 Year 2 EBIT $8.0 $9.6 $12.0 Interest expense 4.0 4.4 4.8 Debt 33.0 39.0 42.0 Total net operating capital 107.1 109.2 111.3 Exteter Enterprise Inc. 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: . Exteter currently has a $40.00 million market value of equity and $26.00 million in debt. The risk-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 Id of 12.10%. Exteter's cost of debt is 7.00% at a tax rate of 30%. The projections assume that the company will have a post-horizon growth rate of 5.00%. . Current total net operating capital is $104.0, 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 securities. m 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.) Value 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 Exteter's equity is 5. Merger analysis - Adjusted present value (APV) approach Wizard Inc., which is considering the acquisition of Exteter Enterprise Inc., estimates that acquiring Exteter 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 3 Year 2 EBIT $8.0 $9.6 $12.0 Interest expense 4.0 4.4 4.8 Debt 33.0 39.0 42.0 Total net operating capital 107.1 109.2 111.3 Exteter Enterprise Inc. 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: . Exteter currently has a $40.00 million market value of equity and $26.00 million in debt. The risk-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 Id of 12.10%. Exteter's cost of debt is 7.00% at a tax rate of 30%. The projections assume that the company will have a post-horizon growth rate of 5.00%. . Current total net operating capital is $104.0, 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 securities. m 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.) Value 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 Exteter's equity is