Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Yin Corp and Yang Inc are considering a merger. Yin expects $75 million in free cash flow next year, which is forecast to grow at

Yin Corp and Yang Inc are considering a merger. Yin expects $75 million in free cash flow next year, which is forecast to grow at 1% forever. Yang expects $25 million in free cash flow next year, which is forecast to grow at 3% forever. Because their cash flows are quite volatile, neither firm has any leverage right now. By merging, Yin and Yang expect to generate more stable cash flows that would allow the combined firm to have 20% leverage without risking default. Suppose the tax rate is 40%, the risk-free rate is 2%, current equity betas for both companies is 1, and the market risk premium is 5%. If the cost of debt issued by the combined firm would be 3%, how much value could the two companies create by merging together?

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

Managerial Finance Essentials

Authors: Charles O. Kroncke, Alan E. Grunewald, Erwin Esser Nemmers

2nd Edition

0829901590, 978-0829901597

More Books

Students also viewed these Finance questions