1. T Corporation is considering the acquisition of M Corporation. M Corporation generates earnings before interest and tax of $1.75 million a year, and asset replacement cost approximately equals depreciation. Alternative minimum tax is not an issue, there are no synergistic benefits, and cash flows are expected to continue forever and are not expected to grow in the future. Assuming a 20 percent tax rate and a 9 percent after-tax required return, what is net cash flow? Assuming year-end cash flows, what is the value of M Corporation’s capital? If M Corporation has long-term debt of $2 million, what is the value of the equity of M Corporation?
2. N Corporation is considering the acquisition of A Corporation. A Corporation has earnings before interest and tax of $1.75 million, and asset replacement cost approximately equals depreciation. Efficiencies gained through the merger will reduce A’s operating costs by $320,000. Cash flows occur at year-end.
Assuming a 20 percent tax rate and a 10 percent required return, what is the value of A’s capital without a merger?
Assuming a 20 percent tax rate and a 10 percent required return, what is the value of A’s capital after a merger?
3. F Corporation is considering the acquisition of T Corporation. Without the merger, T Corporation’s cash flow to capital is expected to be $3 million next year and is expected to grow at a constant 4 percent a year thereafter. With a merger, T Corporation’s constant growth rate will be increased to 6 percent. The tax rate is 30 percent and the after-tax required return is 12 percent. Assume year-end cash flows.
a. What is the value of T’s capital if T is not acquired by F Corporation?
b. What is the value of T’s capital if T is acquired by F Corporation?