5. Caldwell Ine evaluates the potential acquisition of a public traded company Tutwiler Controls. Tutwiler currently has a $62.5 million market value of equity and $27million in debt, for a total market value$89.5 million. Both the companies are under 40% tax bracket. Caldwell plans to assume Tutwiler's existing debt, but both debt levels and interest expenses will vary over the next five years as the acquisition is digested. Caldwell plans to borrow heavily to finance the merger but to reduce its debt over the next five years and will file a consolidated tax return after the merger. After five years horizon free cash flows will grow at a constant rate 6% and capital structure will be stabilized. Table 1: Projected Post-merger Free Cash Flow Statement (figures in millions of dollars) 2021 2022 2023 2024 2025 1. Net sales $105.0 $126.0 $151.0 $174.0 $191.0 80.0 94.0 113.0 130.0 142.0 2.Costs of goods sold 3.Selling & admin. Espeuse 4.Depreciation 10.0 12.0 13.0 15.0 16.0 8.0 8.0 9.0 9.0 10.0 5.EBIT 7.0 12.0 16.0 20.0 23.0 6.Tales on EBIT 2.8 4.8 6.4 8.0 9.2 7.NOPAT 4.2 7.2 9.6 12.0 13.8 8.0 8.0 9.0 9.0 10.0 12.2 15.2 18.6 21.0 23.8 8.Plus Depreciation 9.Operating Cash Flow 10.Less net retention for growth 11. Free Cash Flow 9.0 12.0 13.0 15.0 17.0 3.2 3.2 5.6 6.0 6.8 12.Interest 6.0 5.0 4.0 4.0 4.0 13.Interest Tax Shield 2.4 2.0 1.6 1.6 1.6 The above Table 1 shows the five years of Tutwiler's projected post merger cash flows, taking into account of all synergistic effects, but Caldwell actually plans to operate the Tutwiler subsidiary for many years-perhaps forever. The Tutwiler's bond yield is 9% and its market predetermined premerger beta of is 1.2, risk free rate is 7%, and the market risk premium is 5%. (a) What is the appropriate discount rate for valuing the acquisition? (b) What is the post-merger value for Tutwiler's equity using adjusted present value (APV) approach? Is Tutwiler more valuable as a part of Caldwell than as a stand-alone company being run by its current managers? Caldwell share is currently trading at $1500 and has 40000 share holders. What should be the appropriate premium and exchange ratio of shares should be offered by Caldwell to the shareholders of Tutwiler, if the market price of Tutwiler share be $1000 and has 62500 common stock holders. 5. Caldwell Ine evaluates the potential acquisition of a public traded company Tutwiler Controls. Tutwiler currently has a $62.5 million market value of equity and $27million in debt, for a total market value$89.5 million. Both the companies are under 40% tax bracket. Caldwell plans to assume Tutwiler's existing debt, but both debt levels and interest expenses will vary over the next five years as the acquisition is digested. Caldwell plans to borrow heavily to finance the merger but to reduce its debt over the next five years and will file a consolidated tax return after the merger. After five years horizon free cash flows will grow at a constant rate 6% and capital structure will be stabilized. Table 1: Projected Post-merger Free Cash Flow Statement (figures in millions of dollars) 2021 2022 2023 2024 2025 1. Net sales $105.0 $126.0 $151.0 $174.0 $191.0 80.0 94.0 113.0 130.0 142.0 2.Costs of goods sold 3.Selling & admin. Espeuse 4.Depreciation 10.0 12.0 13.0 15.0 16.0 8.0 8.0 9.0 9.0 10.0 5.EBIT 7.0 12.0 16.0 20.0 23.0 6.Tales on EBIT 2.8 4.8 6.4 8.0 9.2 7.NOPAT 4.2 7.2 9.6 12.0 13.8 8.0 8.0 9.0 9.0 10.0 12.2 15.2 18.6 21.0 23.8 8.Plus Depreciation 9.Operating Cash Flow 10.Less net retention for growth 11. Free Cash Flow 9.0 12.0 13.0 15.0 17.0 3.2 3.2 5.6 6.0 6.8 12.Interest 6.0 5.0 4.0 4.0 4.0 13.Interest Tax Shield 2.4 2.0 1.6 1.6 1.6 The above Table 1 shows the five years of Tutwiler's projected post merger cash flows, taking into account of all synergistic effects, but Caldwell actually plans to operate the Tutwiler subsidiary for many years-perhaps forever. The Tutwiler's bond yield is 9% and its market predetermined premerger beta of is 1.2, risk free rate is 7%, and the market risk premium is 5%. (a) What is the appropriate discount rate for valuing the acquisition? (b) What is the post-merger value for Tutwiler's equity using adjusted present value (APV) approach? Is Tutwiler more valuable as a part of Caldwell than as a stand-alone company being run by its current managers? Caldwell share is currently trading at $1500 and has 40000 share holders. What should be the appropriate premium and exchange ratio of shares should be offered by Caldwell to the shareholders of Tutwiler, if the market price of Tutwiler share be $1000 and has 62500 common stock holders