3. Merger valuation and discounted cash flows When a merger takes place between two companies to form a single firm, the target company does not continue identity. Consider the following scenario: continues does not continue to operate as a separate Newtown Propane Inc. is considering an acquisition of Pirtucon Co., and estimates that acquiring Pirtucon will result in incremental after- tax net cash flows in years 1-3 of $5 million, $7.5 million, and $9 million, respectively. After the first three years, the incremental cash flows contributed by the Pirtucon acquisition are expected to grow at a constant rate of 5% per year. Newtown's current beta is 0.80, but its post-merger beta is expected to be 1.04. The risk-free rate is 4.5%, and the market risk premium is 6.60%. Based on this information, complete the following table by selecting the appropriate values. (Note: Round your intermediate calculations to two decimal places.) Post-merger cost of equity Projected value of the cash flows at the end of three years The value of Pirtucon Co.'s contribution to Newtown Propane Inc. Value Pirtucon Co. has 3 million shares of common stock outstanding. What is the largest tender offer Newtown Propane Inc. should make on each of Pirtucon Co.'s shares? $33.24 $49.86° $41.55
3. Merger valuation and discounted cash flows When a merger takes place between two companies to form a single firm, the target company does not continue identity. Consider the following scenario: continues does not continue to operate as a separate Newtown Propane Inc. is considering an acquisition of Pirtucon Co., and estimates that acquiring Pirtucon will result in incremental after- tax net cash flows in years 1-3 of $5 million, $7.5 million, and $9 million, respectively. After the first three years, the incremental cash flows contributed by the Pirtucon acquisition are expected to grow at a constant rate of 5% per year. Newtown's current beta is 0.80, but its post-merger beta is expected to be 1.04. The risk-free rate is 4.5%, and the market risk premium is 6.60%. Based on this information, complete the following table by selecting the appropriate values. (Note: Round your intermediate calculations to two decimal places.) Post-merger cost of equity Projected value of the cash flows at the end of three years The value of Pirtucon Co.'s contribution to Newtown Propane Inc. Value Pirtucon Co. has 3 million shares of common stock outstanding. What is the largest tender offer Newtown Propane Inc. should make on each of Pirtucon Co.'s shares? $33.24 $49.86° $41.55
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
Problem 5P
Related questions
Question
Transcribed Image Text:3. Merger valuation and discounted cash flows
When a merger takes place between two companies to form a single firm, the target company does not continue
identity.
Consider the following scenario:
continues
does not continue
to operate as a separate
Newtown Propane Inc. is considering an acquisition of Pirtucon Co., and estimates that acquiring Pirtucon will result in incremental after-
tax net cash flows in years 1-3 of $5 million, $7.5 million, and $9 million, respectively.
After the first three years, the incremental cash flows contributed by the Pirtucon acquisition are expected to grow at a constant rate of
5% per year. Newtown's current beta is 0.80, but its post-merger beta is expected to be 1.04. The risk-free rate is 4.5%, and the
market risk premium is 6.60%.
Based on this information, complete the following table by selecting the appropriate values. (Note: Round your intermediate calculations to two
decimal places.)
Post-merger cost of equity
Projected value of the cash flows at the end of three years
The value of Pirtucon Co.'s contribution to Newtown Propane Inc.
Value
Pirtucon Co. has 3 million shares of common stock outstanding. What is the largest tender offer Newtown Propane Inc. should make on each of
Pirtucon Co.'s shares?
$33.24
$49.86°
$41.55
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