Allegiant Travel would like to acquire a small regional competitor, Cape Air.Due to the volatility of the airline industry, we will value these firms based on their 10-year projected Cash Flow.Both currently have no debt.

Allegiant Travel is projected to have cash flow of $135,000,000 per year over the next fifteen years.

Allegiant Travel has an equity cost of capital of 11%

Cape Air is projected to have cash flow of $45,000,000 per year over the next fifteen years.

Cape Air has an equity cost of capital of 13%.

The corporate tax rate is 32%

1- What is the present value of Allegiant Travel?

 

2- What is the present value of Cape Air?

3- Allegiant Travel offers to buy Cape Air for $350,000,000.What immediate return do Cape Air's shareholders receive?

4- In order to buy Cape Air, Allegiant Travel issues a $350,000,000 bond with coupon rate of 6.5%.Using your answer from question 1 for the equity of the company, what percentage of the newly merged company's capital comes from equity?

 

5- What is the Weighted Average Cost of Capital of the new merged company?

6- What is the present value of the newly merged company, assuming there are no synergies, no efficiencies, and the cash flow of the merged company is the sum of the two separate cash flows?

7- How much value was added to Allegiant Travel as a result of the merger?

Answer rating: 100% (QA)

The present value of Allegiant Travel is 97076739275 The present value of ... View the full answer