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Practice Set Chapters 21 and 25 Name: Please type your numerical solutions below. It is highly recommended that you review the assigned worked out homework problems before attempting this assignment. The problems are worked out in excel and will go a long way in illustrating the correct way to complete this assignment. Good luck. 1. B Corporation is considering a copy machine that can be leased for $12,000 a year for 7 years. The company's marginal tax rate is 29 percent and the yield to maturity on the company's debt is 6.9 percent. Compute the cost to lease if lease payments and associated tax savings are at the a. beginning of each year b. end of each year 1. You want a new automobile for personal use. Neither depreciation nor interest payments will be tax deductible. You can buy the automobile with a $2,000 down payment and a 9 percent, forty-eight month loan. The monthly payments will be $605. Alternately, you can lease the automobile with; a $2000 NON -refundable deposit, a $1500 refundable security deposit and lease payments of $517 at the beginning of each month for 48 months. Using a 9 percent annual required return to evaluate the salvage value, what must the car be worth at the end of 48 months for the purchase to be more attractive than the lease? What is the indifference point? Hint-- You will need to find the cost of own and the cost to lease - then you will need to run a goal-seek or manually change the foregone salvage value to find the foregone salvage value that sets the cost to lease equal to the cost to own (by changing the salvage value). (Note - there are videos and other help tools that illustrate the application of the goal seek tool - if you cannot use this tool and want to give me a call - I will talk you through the process - my number is 217-228-5386 - I can only return calls in the continental US). 2. T Corporation is considering the acquisition of M Corporation. M Corporation generates earnings before interest and tax of $1.75 million a year, and asset replacement cost approximately equals depreciation. Alternative minimum tax is not an issue, there are no synergistic benefits, and cash flows are expected to continue forever and are not expected to grow in the future. Assuming a 20 percent tax rate and a 9 percent after-tax required return, what is net cash flow? Assuming year-end cash flows, what is the value of M Corporation's capital? If M Corporation has long-term debt of $2 million, what is the value of the equity of M Corporation? 3. N Corporation is considering the acquisition of A Corporation. A Corporation has earnings before interest and tax of $1.75 million, and asset replacement cost approximately equals depreciation. Efficiencies gained through the merger will reduce A's operating costs by $320,000. Cash flows occur at year-end. a. Assuming a 20 percent tax rate and a 10 percent required return, what is the value of A's capital without a merger? b. 1 F Corporation is considering the acquisition of T Corporation. Without the merger, T Corporation's cash flow to capital is expected to be $3 million next year and is expected to grow at a constant 4 percent a year thereafter. With a merger, T Corporation's constant growth rate will be increased to 6 percent. The tax rate is 30 percent and the after-tax required return is 12 percent. Assume year-end cash flows. a. What is the value of T's capital if T is not acquired by F Corporation? b. 4. Assuming a 20 percent tax rate and a 10 percent required return, what is the value of A's capital after a merger? What is the value of T's capital if T is acquired by F Corporation? (Stock for Stock Merger) A Corporation is considering the acquisition of X Corporation. Each corporation has the following data: Existing Income Number of Shares A Corporation $4,200,000 621,000 X Corporation $2,200,000 365,000 Synergistic additional benefits from the combination are $1,200,000. What is the minimum exchange ratio is necessary to keep the X shareholders whole in terms of earnings per share? What is the maximum exchange ratio would the A Corporation shareholder accept in taking over X Corporation and remain whole in terms of earnings per share? (note you will need to use the formulas in the book to solve this) 5. (Cash for Stock Merger) This problem requires that you integrate the material learned in prior chapters. You have been given the job of evaluating the following merger candidate. You have collected the following cash flow estimates for the acquisition candidate for the proposed merger (in millions): Year 1 2 3 4 5__ Cash flows now for the target 60 80 100 125 150 Additional cash flows (synergy) 40 70 100 125 150 Total cash flows from target (after merger) 100 150 200 250 300 Risk free rate of return Beta for this project (the company after merging) Market risk premium Pre-tax cost of debt Marginal after tax rate Number of shares outstanding for the target company (millions) Current market price per share for the target company Percentage of the acquisition financed with debt Percentage of the acquisition financed with common equity 4% 1.47 5% 8% 25% 10 $51 40% 60% What is the after tax cost of debt for this merger (as we did in chapter 16)? What is the after tax cost of common equity for this merger (as we did in chapter 16)? What is the weighted average cost of capital for this acquisition candidate (as we did in chapter 16)? Please run a net present value using the WACC calculated above with the total cash flows from the target (given above) to determine the maximum price per share you are willing to pay for this target candidate? Based what you calculated and the current market price, would you pursue this candidate