Question 2

The table below shows the projected cash flow statements for Apex Corporation , which is being considered as a target for Hightech, a large conglomerate. The projected data are for the postmerger period, and all synergistic effects have been included. Apex currently usues 50 percent debt, and if it were acquired, Hightech would keep the debt ratio at 50%. Both Hightech and Apex have a 40% marginal federal-plus-state tax rate. Some of the cash flows generated by Apex subsidiary after the merger were retained to finance asset replacements and growth, while some will be transferred to Hightech to pay dividends on its stock, or for redeployment within the corporation. Apex's available cash flow are expected to grow at a constant 10% rate after 2005 Projected Postmerger Cash Flow Statements for Apex Subsidiary as of December31 (millions of dollars) Details 2001 2002 2003 2004 2005 Retentions $4.0 $4.0 $7.0 $9.0 $12.0 Taxes(40%) Interest $8.0 $9.0 $10.0 $11.0 $11.0 Depreciation $8.0 $8.0 $9.0 $9.0 $10.0 Selling & $10.0 $12.0 $13.0 $15.0 $16.0 Admin.expenses COGS as a 70% percent of sales Terminal growth 10% rate available to Hightech Risk free rate 10% Market risk 5% premium Post merger 1.63 beta Net sales $105.0 $126.0 $151.0 $174.0 $191.0 a) What is the appropriate discount rate for valuing the acquisition? (2 marks) (b) What is the terminal value? What is the value of Apex to Hightech? (23 marks)