Company A is considering acquiring Company B. Neither company has any debt. Company A expects the acquisition of Company will generate synergy equal to $2 million per year in after-tax cash flow, indefinitely. The appropriate discount rate, based on the risk of Company B, is 10.0%. Company A's current market value is $100 million. Company B's current market value is $50 million. Company A needs to decide between offering 35% of its stock or $65 million in cash to Company B's shareholders. a) What is the value of Company B to Company A? b) What will the stock offer to Company B cost Company A? c) What is the NPV of the stock offer to the shareholders of Company A? d) What is the NPV of the cash offer to the shareholders of Company A? e) Which alternative should Company A pursue?
Company A is considering acquiring Company B. Neither company has any debt. Company A expects the acquisition of Company will generate synergy equal to $2 million per year in after-tax cash flow, indefinitely. The appropriate discount rate, based on the risk of Company B, is 10.0%. Company A's current market value is $100 million. Company B's current market value is $50 million. Company A needs to decide between offering 35% of its stock or $65 million in cash to Company B's shareholders. a) What is the value of Company B to Company A? b) What will the stock offer to Company B cost Company A? c) What is the NPV of the stock offer to the shareholders of Company A? d) What is the NPV of the cash offer to the shareholders of Company A? e) Which alternative should Company A pursue?
Chapter20: Financing With Derivatives
Section: Chapter Questions
Problem 7P
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Transcribed Image Text:Company A is considering acquiring Company B.
Neither company has any debt. Company A expects
the acquisition of Company will generate synergy
equal to $2 million per year in after-tax cash flow,
indefinitely. The appropriate discount rate, based on
the risk of Company B, is 10.0%. Company A's
current market value is $100 million. Company B's
current market value is $50 million. Company A
needs to decide between offering 35% of its stock or
$65 million in cash to Company B's shareholders.
a) What is the value of Company B to Company A? b)
What will the stock offer to Company B cost
Company A? c) What is the NPV of the stock offer to
the shareholders of Company A? d) What is the NPV
of the cash offer to the shareholders of Company A?
e) Which alternative should Company A pursue?
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