Lee Enterprises and Jackson Distributors are considering a merger. Projections for the coming year for the companies operating independently are as follows:
Lee Enterprises:
EBIT = $200,000
Change in Working Capital = $20,000
Capital Spending = $30,000
Depreciation Expense = $20,000
Jackson Distributors:
EBIT = $450,000
Change in Working Capital = $45,000
Capital Spending = $75,000
Depreciation Expense = $50,000
Before the merger, the firms have the same cost of capital of 14% and the same expected perpetual growth rate of 4%. After the merger, the combined firms are expected to have a cost of capital of 13% and a perpetual growth rate of 5%. The tax rate for both firms is 40%.
1. What is the premerger value of the combined firms?
A. $1,800,000
B. $2,900,000
C. $3,400,000
D. None of the above
2. Ancient Alloys Corp. is interested in acquiring Advanced Technologies, Inc., in the expectation that the acquisition would provide the combined firms with $4 million in tax-shield benefits. If this amount can be used to offset income by $1 million each year for the next four years, what is the present value of the expected tax-shield benefit? The cost of capital is 14%.
A. $877,193
B. $2,913,712
C. $3,508,772
D. $4,203,686