5. Merger analysis - Adjusted present value (APV) approach Aa Aa Eades Logistics Corp., which is considering the acquisition of Galaxy Sun Corp., estimates that acquiring Galaxy Sun will resultin an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 3 $15.0 $18.0 $22.5 6.0 40.6 Total net operating captal107 109.2 111.3 Year 1 Year 2 EBIT Interest expense Debt 5.0 5.5 31.9 37.7 Galaxy Sun Corp. is a publicly traded company, and its market-determined pre-merger beta is 1.20. You also have the following information about the company and the projected statements: Galaxy Sun currenbly has a $18.00 million market value of equity and $11.70 million in debt The risk-free rate is 4.5%, there is a 6.60% arket risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of retum on equity rsL of 12.42%. Galaxy Sun's cost of debt is 6.50% at a tax rate of 30%. The projections assume that the company will have a post-horizon growth rate of 4.00%. Current total net operating capital is $104.0, and the sum of existing debt and debtrequired to maintain a constant capital structure at the time of acquisition is $29 million. The firm does nat have any nonoperating assets such as marketable securities. . Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis Value Unlevered cost of equity Horizon value ofunlevered cash ows Horizon value oftax shield Unlevered value of operations Value of tax shield alue of operations Thus, the total value of Galaxy Sun's equity is Suppose Eades Logistics Corp. plans to use more debt in the first few years of the acquisition of Galaxy Sun Corp. Assuming that using more debt will not lead to an increase in bankruptcy costs for Eades Logistics Corp., the interest tax shields and the value of the tax shield in the analysis, will operations of the acquired firm. leading to a- value of The APV approach is considered useful for valuing acquisition targets, because the method involves finding the values of the unlevered firm and the interest tax shield separately and then summing those values. Why is it difficuit to value certain types of acquisitions using the corporate valuation model? O Because the acquisition is usualy finanoed with new debt that will be repaid rapidly, the proportion of debt in the capital structure changes after the aoquisition. O Because the acquisition is usually financed with equity and no new debt, the proportion of debt in the capital structure remains constant after the acquisition 5. Merger analysis - Adjusted present value (APV) approach Aa Aa Eades Logistics Corp., which is considering the acquisition of Galaxy Sun Corp., estimates that acquiring Galaxy Sun will resultin an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 3 $15.0 $18.0 $22.5 6.0 40.6 Total net operating captal107 109.2 111.3 Year 1 Year 2 EBIT Interest expense Debt 5.0 5.5 31.9 37.7 Galaxy Sun Corp. is a publicly traded company, and its market-determined pre-merger beta is 1.20. You also have the following information about the company and the projected statements: Galaxy Sun currenbly has a $18.00 million market value of equity and $11.70 million in debt The risk-free rate is 4.5%, there is a 6.60% arket risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of retum on equity rsL of 12.42%. Galaxy Sun's cost of debt is 6.50% at a tax rate of 30%. The projections assume that the company will have a post-horizon growth rate of 4.00%. Current total net operating capital is $104.0, and the sum of existing debt and debtrequired to maintain a constant capital structure at the time of acquisition is $29 million. The firm does nat have any nonoperating assets such as marketable securities. . Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis Value Unlevered cost of equity Horizon value ofunlevered cash ows Horizon value oftax shield Unlevered value of operations Value of tax shield alue of operations Thus, the total value of Galaxy Sun's equity is Suppose Eades Logistics Corp. plans to use more debt in the first few years of the acquisition of Galaxy Sun Corp. Assuming that using more debt will not lead to an increase in bankruptcy costs for Eades Logistics Corp., the interest tax shields and the value of the tax shield in the analysis, will operations of the acquired firm. leading to a- value of The APV approach is considered useful for valuing acquisition targets, because the method involves finding the values of the unlevered firm and the interest tax shield separately and then summing those values. Why is it difficuit to value certain types of acquisitions using the corporate valuation model? O Because the acquisition is usualy finanoed with new debt that will be repaid rapidly, the proportion of debt in the capital structure changes after the aoquisition. O Because the acquisition is usually financed with equity and no new debt, the proportion of debt in the capital structure remains constant after the acquisition