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Wizard Inc., which is considering the acquisition of Global Satellite Corp. ( GSC ) , estimates that acquiring GSC will result in an incremental value
Wizard Inc., 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:
Global Satellite Corp. GSC is a publicly traded company, and its marketdetermined premerger beta is You also have the following information
about the company and the projected statements:
GSC currently has a $ million market value of equity and $ million in debt.
The riskfree rate is there is a market risk premium, and the Capital Asset Pricing Model produces a premerger
required rate of return on equity of
GSCs cost of debt is at a tax rate of
The projections assume that the company will have a posthorizon growth rate of
Current total net operating capital is $ and the sum of existing debt and debt required to maintain a constant capital structure
at the time of acquisition is $ 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.
Thus, the total value of GSCs equity is
Suppose Wizard Inc. 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 Wizard Inc., 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?
Because the acquisition is usually financed with new debt that will be repaid rapidly, the proportion of debt in the capital structure
changes after the acquisition.
Because the acquisition is usually financed with equity and no new debt, the proportion of debt in the capital structure remains constant
after the acquisition.
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