XYZ Auto, a national autoparts chain, is considering purchasing a smaller chain, ABC Auto. Pit Row’s analysts project that the merger will result in incremental net cash flows of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. The Year 4 cash flow includes a terminal value of $107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. ABC’s post-merger beta is estimated to be 2.0, and its post-merger tax rate would be 34 percent. The risk-free rate is 8 percent, and the market risk premium is 4 percent. What is the value of ABC Auto to XYZ Auto?
XYZ Auto, a national autoparts chain, is considering purchasing a smaller chain, ABC Auto. Pit Row’s analysts project that the merger will result in incremental net cash flows of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. The Year 4 cash flow includes a terminal value of $107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. ABC’s post-merger beta is estimated to be 2.0, and its post-merger tax rate would be 34 percent. The risk-free rate is 8 percent, and the market risk premium is 4 percent. What is the value of ABC Auto to XYZ Auto?
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter7: Corporate Valuation And Stock Valuation
Section: Chapter Questions
Problem 15MC
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XYZ Auto, a national autoparts chain, is considering purchasing a smaller chain, ABC Auto. Pit Row’s analysts project that the merger will result in incremental net cash flows of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. The Year 4 cash flow includes a terminal value of $107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. ABC’s post-merger beta is estimated to be 2.0, and its post-merger tax rate would be 34 percent. The risk-free rate is 8 percent, and the market risk premium is 4 percent. What is the value of ABC Auto to XYZ Auto?
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