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##### Why WACC cannot be used as a discount for calculating the value of a merger and acquisition for the first few years of the analysis?

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solution

**Question**

Question 1);Why WACC cannot be used as a discount for calculating the value of a merger and acquisition for the first few years of the analysis?;Question 2);When calculating the value of a target for acquisition, why do different acquirers arrive at different valuations for the target?;Question 3);Calculate the cost of unlevered equity if the cost of equity is 20%, the cost of debt is 7%, and the capital is 50% equity and 50% debt.;Question 4);Calculate the cost of funds or WACC if the cost of equity is 20%, the cost of debt is 7%, and the capital is 50% equity and 50% debt. The tax rate is 40%.;Use the following information for Questions 5 through 8;Suppose we are planning to buy a company with the following forecasts;Year 1 2 3 & afterwards;FCF $5 million $ 5.5 million 3% constant growth rate;Debt level $50 million $35 million Constant 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 outstanding;The current stock price is $2.05;The 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%;Question 5);Calculate the value of the debt tax shield.;Question 6);Calculate the horizon value of the target.;Question 7);Calculate the value of operations.;Question 8);What is the highest offer price we can make? Is the acquisition feasible?;Question 9);Why do the target?s free cash flows vary from one acquirer to another?;Question 10);What are the main disadvantages of the payback method for evaluating projects?

Paper#76876 | Written in 18-Jul-2015

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