Aubey Appliance Corporation is considering a merger with theVelmore Vacuum Company. Velmore is a publicly traded company, and its current betais 1.30. Velmore has been barely profitable, so it has paid an average of only 20% intaxes during the last several years. In addition, it uses little debt, having a debt ratio ofjust 25%.If the acquisition were made, Aubey would operate Velmore as a separate, whollyowned subsidiary. Aubey would pay taxes on a consolidated basis, and the tax rate wouldtherefore increase to 35%. Aubey also would increase the debt capitalization in the Velmoresubsidiary to 40% of assets, which would increase its beta to 1.47. Aubey’s acquisition department estimates that Velmore, if acquired, would produce the following cash flows toAubey’s shareholders (in millions of dollars):Year Cash Flows1 $1.252 1.453 1.654 1.855 and beyond Constant growth at 6%These cash flows include all acquisition effects. Aubey’s cost of equity is 14%, its beta is 1.0,and its cost of debt is 10%. The risk-free rate is 9%.a. What discount rate should be used to discount the estimated cash flows? (Hint: UseAubey’s rs to determine the market risk premium.)b. What is the dollar value of Velmore to Aubey?c. Velmore has 1.5 million common shares outstanding. What is the maximum price pershare that Aubey should offer for Velmore? If the tender offer is accepted at this price,what will happen to Aubey’s stock price?
Aubey Appliance Corporation is considering a merger with the
Velmore Vacuum Company. Velmore is a publicly traded company, and its current beta
is 1.30. Velmore has been barely profitable, so it has paid an average of only 20% in
taxes during the last several years. In addition, it uses little debt, having a debt ratio of
just 25%.
If the acquisition were made, Aubey would operate Velmore as a separate, wholly
owned subsidiary. Aubey would pay taxes on a consolidated basis, and the tax rate would
therefore increase to 35%. Aubey also would increase the debt capitalization in the Velmore
subsidiary to 40% of assets, which would increase its beta to 1.47. Aubey’s acquisition department estimates that Velmore, if acquired, would produce the following cash flows to
Aubey’s shareholders (in millions of dollars):
Year Cash Flows
1 $1.25
2 1.45
3 1.65
4 1.85
5 and beyond Constant growth at 6%
These cash flows include all acquisition effects. Aubey’s cost of equity is 14%, its beta is 1.0,
and its cost of debt is 10%. The risk-free rate is 9%.
a. What discount rate should be used to discount the estimated cash flows? (Hint: Use
Aubey’s rs to determine the market risk premium.)
b. What is the dollar value of Velmore to Aubey?
c. Velmore has 1.5 million common shares outstanding. What is the maximum price per
share that Aubey should offer for Velmore? If the tender offer is accepted at this price,
what will happen to Aubey’s stock price?
Want to see the full answer?
Check out a sample Q&A here
Related Finance Q&A
Q: Warehouse Stationary is planning on merging with Whitcoulls. Warehouse's will pay Whitcoulls's…
A: Current price is the market price of the company prevailing in the stock exchange. For the purpose…
Q: Velcro Saddles is contemplating the acquisition of Skiers’ Airbags Inc. The values of the two…
A: a. the value of the stock in the merged company held by the original Skiers’ shareholders is equal…
Q: Velcro Saddles is contemplating the acquisition of Skiers’ Airbags Inc. The values of the two…
A: a. value of the stock in the merged company held by the original Skiers’ shareholders pv of savings…
Q: CBA Corp. is worth $15 million as a stand-alone firm. ABC Corp. has offered 350,000 shares valued at…
A: Given information: Value of CBA Corp. - $15 million ABC corp. offered - 350,000 shares Price of…
Q: The owners of Arthouse Inc., a national artist supplies chain, are contemplating purchasing…
A: Financial statements are statements which states the business activities performed by the company .…
Q: The owners of Arthouse Inc., a national artist supplies chain, are contemplating purchasing…
A: Financial statements are statements which states the business activities performed by the company .…
Q: Kaplan Ltd is contemplating the acquisition of Baron Incorporation. The values of the two companies…
A: Value of companies:Kaplan – 30 mil Baron – 10 mil Reduction in cost - GH 700,000 Time – perpetuity…
Q: DoPharm is evaluating a takeover of Phaneuf Accelerator Inc. by using the FCF and FCFE valuation…
A: Free cash flow of the firm is its cash flow from operations minus capital expenditures. Operating…
Q: Bullant Inc. has decided to go public and has sold 2 million of its shares to its underwriter for…
A: Cost of issue = [ Price after listing - Price at which shares are sold to underwriters ] * Number of…
Q: In early December of 2016, Kettle Corp purchased $50,000 of Icalc Company common stock, which…
A: Prepare appropriate entry(s) at December 31, 2016, 2017, and 2018, and for each year indicate how…
Q: Baguio Company is experiencing financial difficulty and is renegotiating debt restructuring with the…
A: Debt restructuring means debts are swapped with the other options. Debt restructuring can cause…
Q: Beedles Inc. needed to raise $14 million in an IPO and chose Security Brokers Inc. to underwrite the…
A: The initial public offering is a medium of raising equity capital funds from the general public for…
Q: Pearl, Incorporated, has offered $197 million cash for all of the common stock in Jam Corporation.…
A: Cash offer for Jam Corporation = $ 197 million Market value of Jam Corporation = $ 178 million
Q: BBB,Inc sells its unprofitable division A at a gain of $20,000. Before the sale, division A had a…
A: We know that continuing operations means the operating activities of the company which it undertakes…
Q: Kaplan Ltd is contemplating the acquisition of Baron Incorporation. The values of the two companies…
A: We'll first find the present value of perpetuity to calculate the gain from the merger. Cash…
Q: Foremost Manufacturing wants to buy $50,000 of sheet metal from Ore Industries on credit. Before…
A: This question deals with the concept of working capital. When seller sells the goods on credit then,…
Q: Three years ago, a similar effort by HP was rebuffed. Why did it go through with it now? If HP…
A: The Explanation:
Q: Beedles Inc. needed to raise $14 million in an IPO and chose Security Brokers Inc. to underwrite the…
A: Computation of Profit/ Loss : a) Profit or loss = (Number of shares * Price) - Proceeds to Beedles -…
Q: Baguio Company is experiencing financial difficulty and is negotiating debt restructuring with its…
A: Amount of gain/(loss) on extinguishment of debt = Note payable to First Bank - Value of land
Q: Majan Group is considering the acquisition of Mazvon Company in which Mazoon Company would receive…
A: PURCHASE PREMIUM: Purchase price premium is the difference between the acquisition…
Q: Aussie Ltd is considering the acquisition of Kiwi Ltd. The values of the two companies as separate…
A: When a periodic benefit is for an indefinite time, it is known as perpetuity. Present value of…
Q: NewCo is trying to fully acquire OldCo in an all cash offer. NewCo will assume all the debt of OldCo…
A: Given, Expected Synergies from acquisition = $700 million Before acquisition no. of shares = 25…
Q: GS, a computer manufacturer, announces that it will be acquiring FW Software. You know the following…
A: Since you have posted a question with multiple sub-parts, we will solve the first three sub- parts…
Q: Please show all equations and work as needed. Make the correct answer clear. If possible, please…
A: Free cash flow is a perpetuity C = $ 10 mn growing at g = 5%;Tax rate = T = 25%;Cost of debt, Kd =…
Q: In Berkshire Hathaway’s 2012 annual report, Warren Buffett, in discussing the company’s post-control…
A: The situation described above is correct as in GAAP post control acquisition has to be mandatory on…
Q: aura decided to discontinue its entire wholesale division (a major line of business) and to keep its…
A: Financial statement is the statement which states the performance as well as health of the business…
Q: Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would…
A: Time valueThe concept tells that receiving the amount today is of more value than receiving the…
Q: In relation to a failed acquisition, a firm of accountants has invoiced ABC Co. for the sum of…
A: a. Provision is required to be made when it is probable that an economic outflow of resources will…
Q: In relation to a failed acquisition, a firm of accountants has invoiced ABC Co. for the sum of…
A: As per IAS 37 provisions, Contingent liabilities and contingent Assets a contingent liability is a…
Q: LED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as…
A: Click to see the answer
Q: i) On April 28, 2008, Mars Inc. announced that it had reached an agreement to merge with Wrigley…
A: Introduction : In simple words, when two existing companies starts working together as a single…
Q: The Woods Co. and the Mickelson Co. have both announced IPOs at $53 per share. One of these is…
A: For calculating the expected profit situation, the shares will be half of the total no. of shares…
Q: Majan Group is considering the acquisition of Mazoon Company in which Mazoon Company would receive…
A: Click to see the answer
Q: Majan Group is considering the acquisition of Mazoon Company in which Mazoon Company would receive…
A: Merger refers when one company merges its operations with the other company. After merger,…
Q: Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent…
A: Profit margin denotes the percentage of profit amount which a firm or an individual earns from the…
Q: A subsidiary entity, Crystal Ltd, is for sale at a price $ 6 million. There has been some interest…
A: Parent company is the apex company for that controls or manages other daughter(subsidiary)…
Q: Holmes, Inc., has offered $351,887 cash for all of the common stock in Watson Corporation. Based on…
A: In the given question we need to compute the minimum estimated value of the synergistic benefits…
Q: The president and CFO of Spelman Transportation are having a disagreement about whether to use…
A: The question is based on the concept of calculation of weighted average cost of capital (WACC) of a…
Q: Lion Company is considering the acquisition of Tiger Company, Inc. early in 2018. To assess the…
A: Goodwill is an intangible asset which is related with the purchase of one company by another.…
Q: A new CEO was hired to revive the floundering Champion Chemical Corporation. The company had…
A: Quasi Reorganization This is a vague provision under generally accepted accounting principles where…
Q: Spentworth Industries Corp. is considering an acquisition of Keedsler Motors Co., and estimates that…
A: given information constant rate = 3% beta =1.60 post merger beta = 2.08 risk-free rate = 4.5%,…
Q: n (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation…
A: In corporation there are corporate tax and personal taxes but in S corporation there is only…
Q: Lion Bank had $150 million in assets and $60 million in expenses before the acquisition of Sell…
A: Acquisition means a buying of firm by another firm. It generally done by the business to achieve…
Q: ARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who,…
A: Ratio analysis is the good method to know the financial position and financial performance of the…
Q: ARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who,…
A: Overdrafts refer to that financial condition of an account from which money is withdrawn by the…
Q: ARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who,…
A: Annual Overdraft interest=Overdraft amount during the year × Annual rate of interest on overdraft
