Question
ABC Corporation is considering an acquisition of XYZ. XYZ has a capital structure of 40% debt and 60% equity, with a current book value of
ABC Corporation is considering an acquisition of XYZ. XYZ has a capital structure of 40% debt and 60% equity, with a current book value of $20 million in assets. XYZs pre-merger beta is 1.46 and is not likely to be altered as a result of the proposed merger. ABCs pre-merger beta is 1.12, and both it and XYZ face a 35% tax rate. ABCs capital structure is 50% debt and 50% equity, and it has $24 million in total assets. The net cash flows from XYZ available to ABCs stockholders are estimated at $5.0 million for each of the next four years and a terminal value of $19.0 million in Year 4.
Additionally, new debt issued by the combined firm would yield 10% after-tax, and the cost of equity is estimated at 14.59%. Currently, the risk-free rate is 5.0% and the expected market risk return is 15.50%.
- What is the merged firms WACC?
- What is the merged firms new beta?
- What is the appropriate discount rate ABC should use to discount the equity cash flows from XYZ?
- What is the present value (to the nearest thousand) of the XYZ cash inflows to ABC?
- If the acquisition price of XYZ is 145% of XYZs current book value of assets, should ABC proceed with the acquisition?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started