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BUS 530 Week 7 - Valuation of a Merger Target Assignment




Question;Use the following informationSuppose we are planning to buy a company with the following forecasts:Year123 & afterwardsFCF$5 million$ 5.5 million3% constant growth rateDebt level$50 million$35 millionConstant debt to equity ratio. Capital will be 50% debt and 50% equity, wd = ws = 0.5.The cost of debt is 5%The cost of equity is 20%The tax rate is 40%The company has 15 million shares outstandingThe current stock price is $2.05The company is currently holding no financial assets.The company has $3,000,000 in debt.WACC, the cost of capital, is equal to 11.5%RSU, the cost of unlevered equity, is equal to 12.5%QuestionCalculate the value of the debt tax shield.QuestionCalculate the horizon value of the target.QuestionCalculate the value of operations.QuestionWhat is the highest offer price we can make? Is the acquisition feasible?QuestionWhy do the target?s free cash flows vary from one acquirer to another?QuestionWhat are the main disadvantages of the payback method for evaluating projects?


Paper#48564 | Written in 18-Jul-2015

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