Question
Stubborn Motors, Inc. is asking a price of $95 million to be purchased by Rubber Tire Motor Corp. Stubborn Motors currently has total cash flows
Stubborn Motors, Inc. is asking a price of $95 million to be purchased by Rubber Tire Motor Corp. Stubborn Motors currently has total cash flows of $4 million that are expected to grow indefinitely by 1 percent annually. Managers estimate that, because of synergies, the merged firms cash flows will increase by $6 million in the first year after the merger and that these cash flows will grow by an additional 6 percent in years 2 through 4 following the merger. After the first four years, these incremental cash flows will grow at a rate of 1 percent annually. The WACC for the merged firms is 13 percent. Calculate the NPV of the merger. (Enter your answer in millions. Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started