Question
BigCo is buying LittleCo. Before the merger, BigCo had a yearly EBIT of $3M and a cost of equity of 12%. Before the merger, LittleCo
BigCo is buying LittleCo. Before the merger, BigCo had a yearly EBIT of $3M and a cost of equity of 12%. Before the merger, LittleCo had a yearly EBIT of $1M and a cost of equity of 17%. After the merger, the combined firm will have an EBIT of $6M. The tax rate is 35%, and the merger will require BigCo to increase their net working capital by $500,000. BigCo currently has 2M shares outstanding, and LittleCo currently has 700,000 shares outstanding. What price should BigCo offer to pay if they are willing to give LittleCo shareholders 40% of the synergies?
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