om Corporation is considering the acquisition of Jerry Corporation. Jerry Corporation has free cash flows to debt and equity holders of $3,750,000. If Tom Corporations acquires Jerry Corporation, Jerry will reduce operating costs by $1,500,000. This will increase free cash flow to $4,900,000. Assume that cash flows occur at year-end and the weighted average cost of capital is 9%. a. What is the value of Jerry Corporation without a merger? o. What is the value of Jerry Corporation with the merger?

om Corporation is considering the acquisition of Jerry Corporation. Jerry Corporation has free cash flows to debt and equity holders of $3,750,000. If Tom Corporations acquires Jerry Corporation, Jerry will reduce operating costs by $1,500,000. This will increase free cash flow to $4,900,000. Assume that cash flows occur at year-end and the weighted average cost of capital is 9%. a. What is the value of Jerry Corporation without a merger? o. What is the value of Jerry Corporation with the merger?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter6: Accounting For Financial Management

Section: Chapter Questions

Problem 11P: The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are...

See similar textbooks

Similar questions

National Co. make these assumptions for valuation purposes:a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever.b. The income tax rate is 25%.c. After making debt service payments and paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year.d. The equity shareholders finance a portion of the investment in the asset with P60,000,000 of equity capital. (Equity ratio = 6/10 = 60%)e. The firm finances the remainder of the asset using P40,000,000 of debt capital. (Debt ratio = 40% = 4/10)f. This amount of debt in the firm’s capital structure does not alter substantially the risk of the firm to the equity investors, so they continue to require a 12% rate of return.g. The debt is issued at par, and it is less risky than equity; so the debt-holders demand interest of only 7% each year, payable at the end of each year.h. Interest expense is deductible for income tax…
Bakery co. make these assumptions for valuation purposes: a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever. b. The income tax rate is 25%. c. After making paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year. d. Equity shareholders have financed the asset entirely with P100,000,000 of equity capital. e. The cost of equity capital is 12%. 1. Compute for the dividend amount each year to the shareholders. 2. Compute for the dividend amount each year to the shareholders.
National Co. make these assumptions for valuation purposes:a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever.b. The income tax rate is 25%.c. After making paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year.d. Equity shareholders have financed the asset entirely with P100,000,000 of equity capital.e. The cost of equity capital is 12%.Compute for the value of the firm to the shareholders using dividend discount model?
Rian Corporation is currently working without using debt. The estimated operating profit per year is $16.065,180.00 while the equity capitalization rate (ke) is 18% pa. In the coming year, Rian is considering replacing some of his shares with a debt of $50 million, with an interest rate of 15% per annum. Question: a. Calculate the value of own capital capitalization (CS), the total capitalization value of the company (V), and the overall capitalization rate (ko) using the Net Income Approach. b. Calculate the amount of equity capitalized value, total capitalization value of the company, and overall capitalization rate using the traditional approach, if additional debt causes the equity capitalization rate (ke) to increase to 20%. c. Draw a graph of the two approaches.
The following information refers to Questions No. 13 through 15: The financial manager of Apple Co. is evaluating Banana Co. as a possible acquisition. Banana Co. is expected to produce annual after-tax operating cash flows of PI,500,000. Apple Co. will assume P1,000,000 of Banana Co.'s long-term liabilities. Apple Co.'s weighted average cost of capital is 12% and Banana Co.'s weighted average cost of capital is 15%. The acquisition will be evaluated as a perpetuity. Apple Co.'s common stock is trading at P25 per share with 1,000,000 shares outstanding and a P/E ratio of 10. Banana Co.'s stock is trading at P15 per share with 600,000 shares outstanding and a P/E ratio of 15. Based on this information, the estimated market value of the target- company is nearest P 9,000,000. b. 13. a. P10,000,000. P11,000,000. P11,500,000. с. d.
Hastings Corporation is interested in acquiring Vandell Corporation. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.3 million, $2.9 million, $3.4 million, and $3.79 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell’s $10.29 million in debt (which has a 7.4% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.6 million each year for Years 1, 2, and 3. After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.431 million, after which the interest and the tax shield will grow at 5%. Vandell currently has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.10 (i.e., based on its target capital structure). Vandell and Hastings each have a…
Penn Corp. is analyzing the possible acquisition of Teller Company. Both believes the acquisition will increase its total aftertax annual cash flow by $1,176,015.93 indefinitely. The current market value of Teller is $23,453,722 and that of Penn is $63,348,212. The appropriate discount rate for the incremental cash flow is 13.63%. Penn is trying to decide whether it should offer 36% of its stock or $35,478,193 in cash to Teller's shareholders. What is the equity cost of the acquisition? HINT: Compute the value of the combined firm by adding the current value of the target with the present value of the differential cash flow of the combined firm. To determine the equity cost of the acquisition, add the current value of the acquirer and then multiply by the proposed percentage of the stock that has been offered for the firm.
Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)
Penn Corp. is analyzing the possible acquisition of Teller Company. Both believes the acquisition will increase its total aftertax annual cash flow by $1,272,653.1 indefinitely. The current market value of Teller is $23,042,111 and that of Penn is $62,440,594. The appropriate discount rate for the incremental cash flow is 14.22%. Penn is trying to decide whether it should offer 33% of its stock or $36,097,009 in cash to Teller's shareholders. What is the NPV of the stock offer? HINT: Subtract the equity cost (as computed in the previous problem) from the value of the combined firm.
Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hasting plans to assume Vandell’s $10.19 million in debt (which has an 8% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.5 million eachyear for Years 1, 2, and 3. After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.472 million, after which the interest and the tax shield will grow at 5%. As described in Problem 22-4, Vandell currently has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.4 (i.e., based on its target capital structure). Vandell and Hastings each have a 25% combined federal-plus-state tax rate.…
Penn Corp. is analyzing the possible acquisition of Teller Company. Both believes the acquisition will increase its total aftertax annual cash flow by $1,121,625.19 indefinitely. The current market value of Teller is $24,273,531 and that of Penn is $66,093,202. The appropriate discount rate for the incremental cash flow is 11.69%. Penn is trying to decide whether it should offer 30% of its stock or $37,299,371 in cash to Teller's shareholders. What is the NPV of the cash offer? HINT: Subtract the cash offer from the value of the combined firm.
(Capital structure analysis) The liabilities and owners' equity for Campbell Industries is found here: LOADING... . a. What percentage of the firm's assets does the firm finance using debt (liabilities)? b. If Campbell were to purchase a new warehouse for $1.1 million and finance it entirely with long-term debt, what would be the firm's new debt ratio? Accounts payable $519,000 Notes payable $248,000 Current liabilities $767,000 Long-term debt $1,101,000 Common equity $4,647,000 Total liabilities and equity $6,515,000