Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

BigCo is buying LittleCo. They are paying 70% in cash, 30% in equity. The tax rate is 40%. a LittleCo has a levered cost of

BigCo is buying LittleCo. They are paying 70% in cash, 30% in equity. The tax rate is 40%.

a LittleCo has a levered cost of equity of 19%. They bring in $300,000 in EBIT per year and pay $75,000 per year in interest. Five years from now, they will receive a one- time payment of $900,000. What is the value of their equity?

b. BigCo currently produces $850,000 per year in net income and has a levered cost of equity of 16%. After the merger, BigCo will gain access to LittleCos risk management expertise and the appropriate discount rate for these cash flows will drop to 13%. What is the PV of this synergy?

c. If BigCo promises LittleCos shareholders one third of the synergies and BigCo currently has 10,000 shares outstanding, how many shares should LittleCos shareholders receive as part of their payment?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Money Banking And Financial Markets

Authors: Stephen Cecchetti, Kermit Schoenholtz

6th Edition

1260226786, 9781260226782

More Books

Students also viewed these Finance questions