The financial manager of Company X is evaluating Company Y as a possible acquisition. Company Ý is expected to produce annual earnings before interest and taxes P485,000. Depreciation write-offs on Company Y's assets are P120,000 annually. Both companies have a 34% marginal tax rate. If the merger takes place, Company X will assume P1,425,000 of Company Y's long-term liabilities. Company X's weighted average cost of capital is 9.25% and Company Y's weighted average cost of capital is 14.75%. The acquisition will be evaluated as a perpetuity. If Company X acquires Company Y for P1,125,000 in cash, then the estimated change in the combined wealth of Company X's shareholders will be nearest a. P433,729 increase. b. P1,558,729 increase. C. d. P379,830 decrease. P2,207,838 increase.

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter26: Mergers And Corporate Control
Section: Chapter Questions
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10. The financial manager of Company X is evaluating Company Y as a
possible acquisition. Company Y is expected to produce annual
earnings before interest and taxes P485,000. Depreciation write-offs
on Company Y's assets are P120,000 annually. Both companies have
a 34% marginal tax rate. If the merger takes place, Company X will
assume P1,425,000 of Company Y's long-term liabilities. Company
X's weighted average cost of capital is 9.25% and Company Y's
weighted average cost of capital is 14.75%. The acquisition will be
evaluated as a perpetuity. If Company X acquires Company Y for
P1.125,000 in cash, then the estimated change in the combined
wealth of Company X's shareholders will be nearest
a.
P433,729 increase.
b. P1,558,729 increase.
C. P379,830 decrease.
d. P2,207,838 increase.
Transcribed Image Text:10. The financial manager of Company X is evaluating Company Y as a possible acquisition. Company Y is expected to produce annual earnings before interest and taxes P485,000. Depreciation write-offs on Company Y's assets are P120,000 annually. Both companies have a 34% marginal tax rate. If the merger takes place, Company X will assume P1,425,000 of Company Y's long-term liabilities. Company X's weighted average cost of capital is 9.25% and Company Y's weighted average cost of capital is 14.75%. The acquisition will be evaluated as a perpetuity. If Company X acquires Company Y for P1.125,000 in cash, then the estimated change in the combined wealth of Company X's shareholders will be nearest a. P433,729 increase. b. P1,558,729 increase. C. P379,830 decrease. d. P2,207,838 increase.
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