5. Merger analysis - Adjusted present value (APV) approach BTR Warehousing, which is considering the acquisition of Galaxy Sun Corp. estimates that acquiring Galaxy Sun will result in 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 1 Year 2 Year 3 EBIT $7.0 $8.4 $10.5 Interest expense 5.0 5.5 6.0 Debt 34.1 403 434 Total net operating capital 123.6 126,0 128.4 Galaxy Sun Corp. is a publicly traded company, and its market determined pre-merger beta 1.40. You also have the following information about the company and the projected statements: Galaxy Sun Currently has a $20.00 million market value of equity and $13.00 million in debt. The risk-free rates, there is 5.60% market nisk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity bol of 11.34% Galaxy Sun's cost of debt in 5.50 at a tax rate of 40% The projections assume that the company will have a post-ho to growth rate of 4.50 . Current total net operating capital is $120.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is 53 min The firm does not have any nonoperating assets such as market securities ven this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis: (Note: Round your answers to two decimal places, but do not round intermediate calculations.) Value Unlevered cost of equity Horizon value of unlevered cash flows Horizon value of tax shield Unlevered value of operations Value of tax shield Value of operations C - Thus, the total value of Galaxy Sun's equity is BTR Warehousing 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 Bte Warehousing, the interest tax shield and the value of the tax shield in the analysis, will leading to a value of operations of the acquired firm 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 difficult to value certain types of acquisitions using the corporate valuation model The acquiring fie immediately retires the target firm's old debt. Thus, the acquisition deal consists of only new debt in its capital structure The acquiring firm usually assumes the debt of the target firm. Thus, old debt with different coupon rates usually becomes a part of the acquisition deal use the adjusted present value (APV) approach to cal ecimal places, but do not round intermediate calculatio, Value uity evered cash flows shield 10.21% perations 7.80% 6.63% 9.04% of Galaxy Sun's equity is as to use more debt in the first few years of the acquisition of ptcy costs for BTR Warehousing, the interest tax shields and t value of operations of the acquired firm. considered useful for valuing acquisition targets, because the m parately and 6: Mergers and Corporate Control che adjusted present value (APV) approach places, but do not round intermediate calc Value cash flows $89.77 million $85.90 million $60.77 million $13.22 million Sun's equity sore debt in the first few years of the acquisition or BTR Warehousing, the interest tax shields and f operations of the acquired firm. seful for valuing acquisition to then summing ation, use the adjusted present value (APV) approa vo decimal places, but do not round intermediate Value equity unlevered cash flows ax shield f operations s $72.80 million $54.44 million of Galaxy Sun's equity $75.02 million ns to use more debt ir $77.47 million rs of the acquisiu ptcy costs for BTR Warehousing, the interest tax shields value of operations of the acquired firm. onsidered useful for valuin arat assuming that using more debt will not lead to shield in the analysis, will decrease ding the values of the unle increase and the of acquisitions using the corporace valuation onsists of only new debt in its capital coupon rato all Decorate of tax shield Je of operations the total value of Galaxy Sun's equ Narehousing plans to use more debt i crease in bankruptcy costs for BTR Wa ng to a value of operation APV app est tax lower considered useful for vals higher Sarately and then summir al? The acquiring firm immediately retires structure The acquiring firm usually assumes the 4 acquisition deal