You own stock in Make-UP-Artists, Inc. which has just made a bid of $30 million to purchase

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You own stock in Make-UP-Artists, Inc. which has just made a bid of $30 million to purchase MHM Corporation. MHM Corp. currently has total cash flows of $2.5 million that are expected to grow indefinitely by 2 percent annually. Managers estimate that because of synergies the merged firm’s cash flows will increase by $500,000 in the first year after the merger and these cash flows will grow by an additional 4 percent in years 2 through 5 following the merger. After the first five years, these incremental cash flows will grow at a rate of 2 percent annually. The merged firms are expected to have a beta = 1.2, the risk-free rate is 4.5 percent, and the market risk premium is currently 5.5 percent. Calculate the NPV of the merger. Will you vote in favor of the merger?
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Finance Applications and Theory

ISBN: 978-0077861681

3rd edition

Authors: Marcia Cornett, Troy Adair

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