Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Merger analysis - Adjusted present value (APV) approach Widget Corp., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC will

Merger analysis - Adjusted present value (APV) approach

Widget Corp., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC will result in an 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 Year 3
EBIT $13.0 $15.6 $19.5
Interest expense 5.0 5.5 6.0
Debt 35.2 41.6 44.8
Total net operating capital 107.1 109.2 111.3

Global Satellite Corp. (GSC) is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements:

GSC currently has a $38.00 million market value of equity and $24.70 million in debt.
The risk-free rate is 3.5%, there is a 5.60% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity rsLsL of 9.10%.
GSCs 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 $104.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $32 million.
The firm does not have any nonoperating assets such as marketable securities.

Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis. (Note: Only round intermediate calculations when entering them as a final answer.)

Value

Unlevered cost of equity
Horizon value of unlevered cash flows
Horizon value of tax shield
Unlevered value of operations
Value of tax shield
Value of operations

Thus, the total value of GSCs equity is .

Suppose Widget Corp. plans to use more debt in the first few years of the acquisition of Global Satellite Corp. (GSC) Assuming that using more debt will not lead to an increase in bankruptcy costs for Widget Corp., the interest tax shields and the value of the tax shield in the analysis, will , leading to a value of operations of the acquired firm.

The APV approach is considered useful for valuing acquisition targets, because the method involves finding the values of the unlevered firm and the interest tax shield separately and then summing those values. Why is it difficult to value certain types of acquisitions using the corporate valuation model?

The acquiring firm immediately retires the target firms old debt. Thus, the acquisition deal consists of only new debt in its capital structure.

The acquiring firm usually assumes the debt of the target firm. Thus, old debt with different coupon rates usually becomes a part of the acquisition deal.

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

Step: 3

blur-text-image

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

The Meaningful Money Handbook

Authors: Pete Matthew

1st Edition

0857196510, 978-0857196514

More Books

Students also viewed these Finance questions

Question

4. Label problematic uses of language and their remedies

Answered: 1 week ago