Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase it cash inflows by $ 25,000 for each of the next 5 years and by $ 50,000 for each of the following 5 years. Benson has high financial leverage, and Dodd can expect its cost of capital to increase from 12% to 15%, if the merger is undertaken. The cash price of Benson is $ 125,000.
Would you recommend the merger?
Would you recommend the merger if Dodd could use the $ 125,000 to purchase equipment that will return cash inflows by $ 40,000 per year for each of the next 10 years?
If the cost of capital did not change with the merger, would your decision in part b be different? Explain.