Consider the following acquisition data regarding Sunny Squirrel Fabricators Inc. and Red Box Builders Inc.: Sunny Squirrel Fabricators Inc. is considering an acquisition of Red Box Builders Inc. Sunny Squirrel Fabricators Inc. estimates that acquiring Red Box 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 (in millions of dollars) Year 1 Year 2 EBIT 20.0 24.0 Interest expense 4.0 4.4 Debt 33.0 39.0 Total net operating capital 123.6 126.0 Year 3 30.0 4.8 42.0 128.4 Red Box is a publicly traded company, and its market-determined pre-merger beta is 1.20. You also have the following information about the company and the projected statements. Red Box currently has a $22.00 million market value of equity and $14.30 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 return on equity I'sl of 10.22%. Red Box's cost of debt is 5.50% at a tax rate of 30%. The projections assume that the company will have a post-horizon growth rate of 5.50%. Current total net operating capital is $120.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $30 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: Value FCFE horizon value Value of FCFE The estimated value of Red Box's operations after the merger is than the market value of Red Box's equity. This means that the wealth of Red Box's shareholders will if it merges with Sunny Squirrel 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 APV approach. The horizon value in the FCFE approach is only for equity, whereas the horizon value in the APV approach is for the total value of operations. O O True False Consider the following acquisition data regarding Sunny Squirrel Fabricators Inc. and Red Box Builders Inc.: Sunny Squirrel Fabricators Inc. is considering an acquisition of Red Box Builders Inc. Sunny Squirrel Fabricators Inc. estimates that acquiring Red Box 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 (in millions of dollars) Year 1 Year 2 EBIT 20.0 24.0 Interest expense 4.0 4.4 Debt 33.0 39.0 Total net operating capital 123.6 126.0 Year 3 30.0 4.8 42.0 128.4 Red Box is a publicly traded company, and its market-determined pre-merger beta is 1.20. You also have the following information about the company and the projected statements. Red Box currently has a $22.00 million market value of equity and $14.30 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 return on equity I'sl of 10.22%. Red Box's cost of debt is 5.50% at a tax rate of 30%. The projections assume that the company will have a post-horizon growth rate of 5.50%. Current total net operating capital is $120.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $30 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: Value FCFE horizon value Value of FCFE The estimated value of Red Box's operations after the merger is than the market value of Red Box's equity. This means that the wealth of Red Box's shareholders will if it merges with Sunny Squirrel 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 APV approach. The horizon value in the FCFE approach is only for equity, whereas the horizon value in the APV approach is for the total value of operations. O O True False
