Taking the same circumstances as in Problem 14.1 , without the takeover CDD Ltd had expected annual end-of-year cash inflows of £1.5 million for ever and an estimated cost of capital of 18 per cent p.a.

What is the minimum that the shareholders of CDD Ltd should logically accept for their shares in the takeover?

Logically, what should be the finally agreed total price for CDD Ltd’s equity?

Data from Problem 14.1

ABB plc has a cost of capital of 20 per cent p.a. It is expected to generate annual endof-

year cash inflows of £12 million a year for ever.

The capital projects department has identified a smaller business, CDD Ltd, which it believes would be a suitable takeover target for ABB plc. It is estimated that the combined operation would have a perpetual end-of-year cash inflow of £14 million.

ABB plc’s capital projects department analysts estimate that it would be worth the business paying up to £27.5 million to acquire the entire equity of CDD Ltd.

What cost of capital must the analysts have estimated for the combined operation?

(Ignore taxation.)