ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DOT COM ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DO | Page 25

at a constant 4 percent a year thereafter. With a merger, T
Corporation’s constant growth rate will be increased to 6 percent. The
tax rate is 40 percent and the after-tax required return is 10 percent.
Assume year-end cash Nlows. a. What is the value of T’s capital if T
is not acquired by F Corporation? Cash &low in year (I) = 6
million x (1+0.04)i After tax Cash flow in year (I) = $6 million x
(1+0.04)i x (1-0.4)
= 2.1 million x (1+0.04)i
PV = $2 million / {1 - (1.04/1.12)}
= 2 x 1.12/0.08
= $28 million b. What is the value of T’s capital if T is acquired by F
Corporation? Merger
Cash flow in year (i) = 6 million x (1+0.06)i
After tax Cash flow in year (i) = $6 million x (1+0.06)i x (1-0.3)
= 2.1 million x (1+0.06)i
PV = $2 million / {1 - (1.06/1.12)}
= 2 x 1.12/0.06
= $37.33 million 6. (Stock for Stock Merger) A Corporation is
considering the acquisition of X Corporation. Each corporation has
the following data: Existing Income Number of Shares A Corporation
$8,200,000 621,000 X Corporation $4,200,000 365,000 Synergistic
additional beneNits from the combination are $1,800,000. What is the
minimum exchange ratio is necessary to keep the X shareholders
whole in terms of earnings per share? What is the maximum exchange
ratio would the A Corporation shareholder accept in taking over X
Corporation and remain whole in terms of earnings per share? (note
you will need to use the formulas in the book to solve this) 7. (Cash
for Stock Merger) This problem requires that you integrate the
material learned in prior chapters. You have been given the job of
evaluating the following merger candidate. You have collected the
following cash Nlow estimates for the acquisition candidate for the
proposed merger (in millions): Year 1 2 3 4 5__ Cash Nlows now for
the target 60 80 100 125 150 Additional cash Nlows (synergy) 40 70
100 125 150 Total cash Nlows from target (after merger) 100 150 200
250 300 Risk free rate of return Beta for this project (the company
after merging) Market risk premium Pre-tax cost of debt Marginal
after tax rate Number of shares outstanding for the target company