Cuppy World is considering purchasing a competitor, Cupcake. Projected cash flows as a result of the merger are: Year 1, P1,450,000; Year 2, P1,750,000; Year 3, P2,000,000; Year 4, P2,500,000. In addition, Cupcake's year4 cash flows are expected to grow at a constant rate of 6% after year 4. Cupcake's post-merger beta is estimated to be 1.2 and its post-merger tax rate is 40%. The risk-free rate is 8% and the market risk premium is 4%. 1. Compute for the maximum bid price that Cuppy World can offer in the acquisition. 2. How much is the net advantage/disadvantage to Cuppy World if it acquires Cupcake's 10,000,000 shares at the current market price of P9?

Cuppy World is considering purchasing a competitor, Cupcake. Projected cash flows as a result of the merger are: Year 1, P1,450,000; Year 2, P1,750,000; Year 3, P2,000,000; Year 4, P2,500,000. In addition, Cupcake's year4 cash flows are expected to grow at a constant rate of 6% after year 4. Cupcake's post-merger beta is estimated to be 1.2 and its post-merger tax rate is 40%. The risk-free rate is 8% and the market risk premium is 4%. 1. Compute for the maximum bid price that Cuppy World can offer in the acquisition. 2. How much is the net advantage/disadvantage to Cuppy World if it acquires Cupcake's 10,000,000 shares at the current market price of P9?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 18P

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