1. Merger analysis - Free cash flow to equity (FCFE) approach Wellington Industries is considering an acquisition of Purple Turtle Corp.. Wellington Industries estimates that acquiring Purple Turtle will result in incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial staternents of the target company: Purple Turtle is a publicly traded company, and its market-determined pre-merger beta is 1.40. You also have the following information about the company and the projected statements: - Purple Turtle currently has a $14.00 million market value of equity and $9.10 million in debt. - The risk-free rate is 5.5% with a 7.60% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity rsL of 16.14%. - Purple Turtle's cost of debt is 7.50% at a tax rate of 30%. - The projections assume that the company will have a post-horizon growth rate of 6.00%. - Current total net operating capital is $118.0 million, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $28 million. - The firm has no nonoperating assets, such as marketable securities. With the given information, use the free cash fow to equity (FCFE) approach to calculate the following values involved in the merger analysis. (Note: Round your answer to two decinal places, but do not round intermediate calculations.) The estimated value of Purple Turtle's operations after the merger is than the market value of Purple Turtle's equity. This means that the wealth of Purple Turtle's shareholders will if it merges with Wellington rather than remaining as a stand-alone corporation. True or False: Like the corporate valuation model, the FCFE model can be applied only when the capital structure is constant. False True 1. Merger analysis - Free cash flow to equity (FCFE) approach Wellington Industries is considering an acquisition of Purple Turtle Corp.. Wellington Industries estimates that acquiring Purple Turtle will result in incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial staternents of the target company: Purple Turtle is a publicly traded company, and its market-determined pre-merger beta is 1.40. You also have the following information about the company and the projected statements: - Purple Turtle currently has a $14.00 million market value of equity and $9.10 million in debt. - The risk-free rate is 5.5% with a 7.60% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity rsL of 16.14%. - Purple Turtle's cost of debt is 7.50% at a tax rate of 30%. - The projections assume that the company will have a post-horizon growth rate of 6.00%. - Current total net operating capital is $118.0 million, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $28 million. - The firm has no nonoperating assets, such as marketable securities. With the given information, use the free cash fow to equity (FCFE) approach to calculate the following values involved in the merger analysis. (Note: Round your answer to two decinal places, but do not round intermediate calculations.) The estimated value of Purple Turtle's operations after the merger is than the market value of Purple Turtle's equity. This means that the wealth of Purple Turtle's shareholders will if it merges with Wellington rather than remaining as a stand-alone corporation. True or False: Like the corporate valuation model, the FCFE model can be applied only when the capital structure is constant. False True
