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You are the CEO of a private company and want to buy it. There is one major shareholder who

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Question

1. You are the CEO of a private company and want to buy it. There is one major shareholder who;owns 65 percent of the firm. The remaining 35 percent is held by oceanic shareholders. Based;on a DCF model, you estimate the base value of the firm to be $120 million. This excludes any;liquidity discount and/or control premium. Based on your observations of the market, liquidity;discounts are about 25 percent and control premiums are about 30 percent for similar deals. Your;firm has 60 million shares outstanding.;What would you offer to pay per share to the controlling shareholder? To the oceanic;shareholders?;2. Two auto parts manufacturers have agreed to merge. By streamlining operations, the;merger is projected to generate pretax cost savings of $65 million in the first year, $125;million in the second year, $190 million in the third year, and thereafter growing at the;rate of inflation. To achieve these cost savings an investment of $520 million must be;made at the outset. Sales of redundant equipment and property are expected to bring in;pretax gains of $61 million in the first year and $55 million in the second year. There is a;high probability that these projections will materialize. The merged company's cost of;capital is forecast at 9.1 percent, borrowing cost is expected to be 7.3 percent. Inflation is;3.0 percent.;What is the present value of savings? (Assume a marginal tax rate of 42 percent.)

 

Paper#30635 | Written in 18-Jul-2015

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