ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DOT COM ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DO | Page 24

attractive
3. T Corporation is considering the acquisition of M Corporation. M
Corporation generates earnings before interest and tax of $2.75
million a year, and asset replacement cost approximately equals
depreciation. Alternative minimum tax is not an issue, there are no
synergistic beneNits, and cash Nlows are expected to continue forever
and are not expected to grow in the future. Assuming a 25 percent tax
rate and a 8 percent after-tax required return, what is net cash Nlow?
Assuming year-end cash Nlows, what is the value of M Corporation’s
capital? If M Corporation has long-term debt of $3 million, what is
the value of the equity of M Corporation? Answer: EBIT =
$2,750,000
Tax Expenses = 25% x 2,750,000 = 687,500
EBT = 2,750,000 - 687,500 = 2,062,500
Si