5. Merger analysis - Adjusted present value (APV) approach RTE Telecom Inc., which is considering the acquisition of Gidbo-Chem Co., estimates that acquiring Globo-Chem 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 $11.0 $13.2 $16.5 EBIT Interest expense 3.0 3.3 3.6 Debt 34.1 40.3 43.4 Total net operating capital 105. 1 107 1 109.1 Globo-Chem Co. a publicly traded company, and its market determined pre-merger beta is 1.60. You also have the following information about the company and the projected statements: . Globo-Chem currently has a $16.00 million market value of equity and $10.40 million in debt. + The risk free rate is 5%, there is a 7.10% market nisk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity Ts of 16.36%. Globo-Chem's cost of debt is 7.00% 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 $102.0, and the sum of existing debt and debt required to ma in a constant capital structure at the time of acquisition is $31 million The fim does not have any nonoperating assets such as marketable securities CREME Ch 26: Assignment - Mergers and Corporate Control 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 Thus, the total value of Globo Chem's equity is Suppose RTE Telecom Inc. plans to use more debt in the first few years of the acquisition of Globo-Chem Co. Assuming that using more debt will not bad to an increase in bankruptcy costs for RTE Telecom Inc., the interest tax shields and the value of the tax shield in the analys, will leading to 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? 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 Because the acquisition is usually financed with new debt that will be repaid rapidly, the proportion of debe in the capital structure charges after the acquisition 5. Merger analysis - Adjusted present value (APV) approach RTE Telecom Inc., which is considering the acquisition of Gidbo-Chem Co., estimates that acquiring Globo-Chem 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 $11.0 $13.2 $16.5 EBIT Interest expense 3.0 3.3 3.6 Debt 34.1 40.3 43.4 Total net operating capital 105. 1 107 1 109.1 Globo-Chem Co. a publicly traded company, and its market determined pre-merger beta is 1.60. You also have the following information about the company and the projected statements: . Globo-Chem currently has a $16.00 million market value of equity and $10.40 million in debt. + The risk free rate is 5%, there is a 7.10% market nisk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity Ts of 16.36%. Globo-Chem's cost of debt is 7.00% 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 $102.0, and the sum of existing debt and debt required to ma in a constant capital structure at the time of acquisition is $31 million The fim does not have any nonoperating assets such as marketable securities CREME Ch 26: Assignment - Mergers and Corporate Control 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 Thus, the total value of Globo Chem's equity is Suppose RTE Telecom Inc. plans to use more debt in the first few years of the acquisition of Globo-Chem Co. Assuming that using more debt will not bad to an increase in bankruptcy costs for RTE Telecom Inc., the interest tax shields and the value of the tax shield in the analys, will leading to 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? 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 Because the acquisition is usually financed with new debt that will be repaid rapidly, the proportion of debe in the capital structure charges after the acquisition