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QUESTION 4 The French multinational retailer company Farrefour intends to make an offer for the Italian company Tennet. You have been assigned to estimate the highest price Farrefour should pay for the stock in Tennet to break-even. Give the answer both when Farrefour pays with stocks and when Farrefour pays with cash. When Farrefour pays in cash assume that Farrefour borrow the whole amount and that their cost of capital while then increase to 12%. Farrefour 750.00 60.00 Tennet 250.00 30.00 Revenues (EUR millions) After-tax Operating income next year (EUR millions) Cost of capital Return on capital Net Debt (EUR millions) Number of shares millions) 8.00% 9.00% 7.5096 100.00 125 6.00% 50.00 50 Both firms are in stable growth, growing 3% a year in perpetuity. In your estimations assume that combining the two firms will be able to cut annual operating expenses by EUR 18 million (on an after-tax basis), though it will take three years for these costs savings to show up. Tip. To estimate the cost of capital of the combined firm use the weighted average FV of the firms and their given cost of capital in the table above. QUESTION 4 The French multinational retailer company Farrefour intends to make an offer for the Italian company Tennet. You have been assigned to estimate the highest price Farrefour should pay for the stock in Tennet to break-even. Give the answer both when Farrefour pays with stocks and when Farrefour pays with cash. When Farrefour pays in cash assume that Farrefour borrow the whole amount and that their cost of capital while then increase to 12%. Farrefour 750.00 60.00 Tennet 250.00 30.00 Revenues (EUR millions) After-tax Operating income next year (EUR millions) Cost of capital Return on capital Net Debt (EUR millions) Number of shares millions) 8.00% 9.00% 7.5096 100.00 125 6.00% 50.00 50 Both firms are in stable growth, growing 3% a year in perpetuity. In your estimations assume that combining the two firms will be able to cut annual operating expenses by EUR 18 million (on an after-tax basis), though it will take three years for these costs savings to show up. Tip. To estimate the cost of capital of the combined firm use the weighted average FV of the firms and their given cost of capital in the table above