Question 26 26 points Save Answer ABC management is currently considering a merger with XYZ. Both companies are in the same industry, and both companies' shares sell at a ratio of price to free cash flow of 10. If the two companies merged, there is no reason to believe that this valuation multiple would change. ABC has 10 million shares outstanding, selling at a price of $17 per share. XZY has 7 million shares outstanding. Neither company has any debt. XYZ has revenues of $250 million per year and cash operating costs of $150 million per year. Annual depreciation expense is $45 million and annual capital expenditures are $60 million per year. XYZ also invests $15 million each year in additional net working capital. The corporate tax If ABC and XYZ were to merge, ABC believes that it could apply its superior inventory control and accounts receivable management techniques to XYZ and thereby cut XYZ's annual investment in net working capital in half. The two companies management teams are now trying to negotiate the terms of a merger a. (6 pt) What is the value of XYZ to ABC? b. (8 pt) ABC management proposes to pay $13 cash for each XYZ share. What is the Net Present Value (NPV) of this offer to ABC? c. (8 pt) XYZ management counters with a proposal under which ABC would offer 0.9 ABC share for each currently outstanding XYZ share. What is the NPV of this offer to ABC? What is the amount of premium paid? d. (4t) How many ABC shares should ABC company offer for each currently outstanding XYZ share if ABC wants NPV of the stock offer to be the same as cash deal in part(b) 7