Acme Inc. is seeking to acquire 100% of the shares of Tomahawk Inc. Tomahawk is a stable growing firm, with EBIT of $90 million in Year 0, growing at a constant rate of 3% forever. Acme predicts that under its control, Tomahawk can achieve a ROIC of 12%. Tomahawk currently has debt of $160 million (market value) and cash of $20 million. The tax rate is 25%. The WACC of Acme is 9.0%, and the WACC of Tomahawk is 11.0%. Tomahawk has 80 million shares outstanding, trading at an EV/EBIT0 multiple of 5.8 times the EBIT reported in Year 0. 

(i) Assuming that Acme can acquire 100% of Tomahawk by offering a 20% premium over the current stock price in a cash transaction, estimate the value created for Acme' shareholders through the acquisition.

Answer rating: 100% (QA)

Value creation for Acmes shareholders through the acquisition of Tomahawk Acmes acquisition of Tomahawk can be analyzed using the following steps 1 Ca... View the full answer