Question

Two identical firms have yearly after-tax cash flows of $20 million each, which are expected to...

Two identical firms have yearly after-tax cash flows of $20 million each, which are expected to continue into perpetuity. If the firms merged, the after-tax cash flow of the combined firm would be $42 million. Assume a cost of capital of 12%. Does the merger generate synergy? What is change in overall firm value from the merger? What is the value of the target firm to the bidding firm?

Homework Answers

Answer #1
Company-I Company-II Merged firm
Cash flow 20 20 42
Discount rate 12% 12% 12%
PV of future cash flows =20/12% =20/12% =42/12%
PV of future cash flows 166.6667 166.6667 350
Value of merged firm     350.00
Less-Company I Value    (166.67)
Less-Company II Value    (166.67)
Synergy Gain        16.67
Overall firm value will increase by 16.67
Maximum value of target firm to the bidding firm
Firm's own value     166.67
Add Synergy gain        16.67
Total value     183.33
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You have the following information on an M&A deal, between two all equity firms that operate...
You have the following information on an M&A deal, between two all equity firms that operate in the same industry. The cost of equity for both firms is the same and equal to 10%. For each of the firms capital expenditures are equal to depreciation and net working capital is expected to remain constant forever. The EBIT of the acquirer is a constant perpetuity equal to £100 million per year, and the EBIT of the target is constant perpetuity of...
A project will cost $204,661.00 today. The project is then expected to generate after-tax cash flows...
A project will cost $204,661.00 today. The project is then expected to generate after-tax cash flows of $30,000.00 per year. An economist also projects that the project will create synergies with other products for the firm and the synergies will create an after-tax cash flow of $12,261.00 per year. The cost of capital for the firm is 10.00%. The firm will run the project for 11.00 years. What is the NPV of this project?
Consider two​ firms, With and​ Without, that have identical assets that generate identical cash flows. Without...
Consider two​ firms, With and​ Without, that have identical assets that generate identical cash flows. Without is an allminus−equity ​firm, with 1 million shares outstanding that trade at a price of​ $24 per share. With has 2 million shares outstanding and​ $12 million of debt at an interest rate of​ 5%. Assume that​ MM's perfect capital markets conditions are met and that you can borrow and lend at the same​ 5% rate as With. You have​ $5000 of your own...
Consider two firms, with and without, that have identical assets that generate identical cash flows. Without...
Consider two firms, with and without, that have identical assets that generate identical cash flows. Without is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. With has 2 million shares outstanding and $12 million dollars in debt at an interest rate of 5%. a) Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With. You have $5000 of...
A project is expected to generate the following cash flows:   Year Project after-tax cash flows -$350...
A project is expected to generate the following cash flows:   Year Project after-tax cash flows -$350 150 -25 300 The project's cost of capital is 10%, calculate this project’s MIRR.
Consider two firms, Firm L and Firm U, that have identical assets that generate identical cash...
Consider two firms, Firm L and Firm U, that have identical assets that generate identical cash flows. Firm U is an all-equity firm, with 1 million shares outstanding that trade for a price of $26 per share. Firm L has 2 million shares outstanding and $12 million in debt at an interest rate of 5%. Assume that Modigliani and Miller's (1958) perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as...
Firm A has a value of $500 million and Firm B has a value of $300...
Firm A has a value of $500 million and Firm B has a value of $300 million. Firm A has 1000 shares outstanding, and Firm B has 800 shares outstanding. Suppose that the merger would increase cash flows of the combined firm by $5 million in perpetuity. Assuming the cost of capital for the new firm is 5%. If Firm A purchases Firm B for $330 million, how much do Firm B's shareholders gain from this merger? A. $30 million...
A company is forecasted to generate free cash flows of $62 million for the next three...
A company is forecasted to generate free cash flows of $62 million for the next three years. After that, cash flows are projected to grow at a 2.9% annual rate in perpetuity. The company's cost of capital is 7.3%. The company has $77 million in debt, $11 million of cash, and 21 million shares outstanding. What's the value of each share?
Standish Inc. is a conglomerate that is expected to generate $100 million in after-tax operating income...
Standish Inc. is a conglomerate that is expected to generate $100 million in after-tax operating income next year, growing at 2.50% a year in perpetuity. It is planning to sell of its steel division for $200 million and you have been given the following information on the company and its steel division. Estimate the value of Standish's equity after the divestiture assuming that it has no cash and no debt, pre divestiture, but plans to hold the divestiture proceeds as...
Corporations Alpha and Beta have identical assets that generate identical cash flows and as result both...
Corporations Alpha and Beta have identical assets that generate identical cash flows and as result both have market value of V. They differ only in their capital structure.  Alpha has debt equal to​ 20% of the value of the firm​ V, while Beta has debt equal to​ 10% of V. The debt of both corporations is​ risk-free with a​ risk-free interest rate of r. There are no taxes and capital markets are perfect. If Mr Pi owns​ 10% of Corporation​...