6. Merger analysis - Free cash flow to equity (FCFE) approach Wellington Industries is considering an acquisition of Orators Telecom Inc.. Wellington Industries estimates that acquiring Orators 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 Data Collected (Millions of dollars) Year 1 (Millions of dollars) Year 2 (Millions of dollars) Year 3 EBIT 14.4 5.5 18.0 12.0 5.0 29.7 Interest expense Debt Total net operating capital 6.0 35.1 109.2 1113 37.8 113.4 Orators is a publicly traded company, and its market-determined pre-merger bete is 1.20. You also have the following information about the company and the projected statements: Orators currently has a $10.00 million market value of equity and $6.50 milion 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 return on equity of 10.22% Orators's cost of debt is 5.50% at a tax rate of 35% The projections assume that the company will have a post horizon growth rate of 4,50% Current total net operating capital is $106.0 million, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $27 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, but do not round intermediate calculations.) Value FCFE horizon value Value of FCFE The estimated value of Orators's operations after the merger is than the market value of Orators's quity. This means that the wealth of Orators's shareholders will it merges with Wellington rather than remaining as a stand-alone corporation True or False: The horizon value in the FCFE approach is different from the horizon value in the adjusted present value (APV) approach. The horizon value in the FCFE approach is only for equity, whereas the honton value in the APV approach is for the total value of operations True False million, and structure at the time of acquisition is $27 million. The firm has no nonoperating assets, such as marketable With the given information, use the free cash flow to equity (FCFE) Round your answer to two decimal places, but do not round intermed Value FCFE horizon value Value of FCFE $153.46 million The estimated value of $161.86 million after the merger is thar Orators's shareholders w fit merges with Wellington rati $158.74 million True or False: The horizo $174.96 million approach is different from the value in the FCFE approach is only for equity, whereas the horizon value in ti a True False With the given information, use the free cash flow to equity (FCFE Round your answer to two decimal places, but do not round intern Value FCFE horizon value Value of FCFE $135.55 million The estimated value of s after the merger is Orators's shareholders w $152.52 million fit merges with Wellington $40.04 million True or False: The horizo E approach is different from value in the FCFE approa $132.02 million ty, whereas the horizon value True False
