Merger valuation and discounted cash flows

When an acquirer assesses a potential target, the price the acquirer is willing to pay should be based on the value of:

The target firms equity

The target firms debt

The target firms total corporate value (debt and equity)

Consider the following scenario:

Tako Pictures Inc. is considering an acquisition of Keedsler Motors Co., and estimates that acquiring Keedsler will result in incremental after-tax net cash flows in years 13 of $7 million, $10.5 million, and $12.6 million, respectively.

After the first three years, the incremental cash flows contributed by the Keedsler acquisition are expected to grow at a constant rate of 6% per year. Takos current beta is 1.60, but its post-merger beta is expected to be 2.08. The risk-free rate is 3%, and the market risk premium is 5.10%.

Based on this information, complete the following table by selecting the appropriate values. (Note: Round your intermediate calculations to two decimal places.)

	Value
Post-merger cost of equity	13.61%
Projected value of the cash flows at the end of three years
The value of Keedsler Motors Co.s contribution to Tako Pictures Inc.

Keedsler Motors Co. has 6 million shares of common stock outstanding. What is the largest tender offer Tako Pictures Inc. should make on each of Keedsler Motors Co.s shares?

$19.01

$23.77

$28.52