Wansley Corp is evaluating the acquisition of Alabama Company. Wansleys analyst projects the following post-merger cash flows
Question:
Wansley Corp is evaluating the acquisition of Alabama Company. Wansley’s analyst projects the following post-merger cash flows for Alabama Company if purchased by Wansley.
Year 1 Year 2
Net Sales $540 $600
Oper Expenses 350 360
Interest 24 30
Depreciation 10 10
Net Investment 10 10
In Operating Capital
The current market beta for Alabama Company is 1.2 and its tax rate is 25% before the merger and 25% after the merger and has a current debt ratio of 60%. Assume a market return of 9% and a risk free rate of 4%.
a. What is the appropriate discount rate to use in calculating the value of the acquisition? (Use the adjusted present value method).
b. What are the free cash flows for the two years and tax shield for two years?
c. If we assume constant growth of 4% after the year 2 and beyond, calculate the horizon value of free cash flows and the horizon value of tax shield flows.
d. Find the value of company operations. (no non-operating assets)
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter