Question
The firm of which you are the CFO, the tom Company , wants to take over a competitor, whose name is Target Company . The
The firm of which you are the CFO, the tom Company, wants to take over a competitor, whose name is Target Company. The following is known about this take-over:
- The WACC of the tom Company is 11.2%
- The WACC of Target Company is 8.9%
- Target Company has 1,200,000 shares outstanding and the current stock price is $8.15.
- The following cash flows are expected:
Year: | Synergy Savings at Target Company: | Synergy Savings at the tom Company: |
1 | $200,000 | $550,000 |
2 | $450,000 | $700,000 |
3 | $550,000 | $750,000 |
4 | $700,000 | $1,500,000 |
5 | $1,900,000 | $2,300,000 |
Draw a graph in which you indicate the wealth for shareholders of the tom Company and Target Company when this take-over succeeds. Clearly indicate the benefit for the shareholders of the tom Company and Target Company if the take-over price is $9.25.
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