5. Merger analysis - Free cash flow to equity (FCFE) approach Consider the following acquisition data regarding Washington Company and Rapid Route Logistics: Washington Company is considering an acquisition of Rapid Route Logistics Washington Company estimates that acquiring Rapid Route will result in 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. Rapid Route is a publicly traded company, and its market-detemined pre-merger beta is 1.40. You also have the following information about the company and the projected statements. - Rapid Route currently has a $14.00 million market value of equity and $9.10 million in debt. - The risk-free rate is 3.5% with a 5.60% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of retum on equity r5L of 11.34%. - Rapid Route's cost of debt is 5.50% at a tax rate of 40%. - The projections assume that the company will have a post-horizon growth rate of 4.50%. - Current total net operating capital is $120.0 million, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $31 million. - The firm has no nonoperating assets, such as marketable securities. With the given information, use the free cash flow to equity (FCFE) approach to calculate the following values involved in the merger analysis. (Note: Round your answer to two decimal places.) The estimated value of Rapid Route's operations after the merger is than the market value of Rapid Route's equity. This means that the wealth of Rapid Route's shareholders will if it merges with Washington 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 5. Merger analysis - Free cash flow to equity (FCFE) approach Consider the following acquisition data regarding Washington Company and Rapid Route Logistics: Washington Company is considering an acquisition of Rapid Route Logistics Washington Company estimates that acquiring Rapid Route will result in 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. Rapid Route is a publicly traded company, and its market-detemined pre-merger beta is 1.40. You also have the following information about the company and the projected statements. - Rapid Route currently has a $14.00 million market value of equity and $9.10 million in debt. - The risk-free rate is 3.5% with a 5.60% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of retum on equity r5L of 11.34%. - Rapid Route's cost of debt is 5.50% at a tax rate of 40%. - The projections assume that the company will have a post-horizon growth rate of 4.50%. - Current total net operating capital is $120.0 million, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $31 million. - The firm has no nonoperating assets, such as marketable securities. With the given information, use the free cash flow to equity (FCFE) approach to calculate the following values involved in the merger analysis. (Note: Round your answer to two decimal places.) The estimated value of Rapid Route's operations after the merger is than the market value of Rapid Route's equity. This means that the wealth of Rapid Route's shareholders will if it merges with Washington 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
