EBK PRINCIPLES OF MANAGERIAL FINANCE
14th Edition
ISBN: 8220100666759
Author: ZUTTER
Publisher: PEARSON
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Chapter 18, Problem 18.5P
Cash acquisition decision Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase its
- a. Would you recommend the merger?
- b. Would you recommend the merger if Dodd could use the $125,000 to purchase equipment that will return cash inflows of $40,000 per year for each of the next 10 years?
- c. If the cost of capital did not change with the merger, would your decision in part b be different? Explain.
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Cash acquisition decision Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase its cash inflows by $25,000 for each of the next 5 years and by $50,000 for each of the following 5 years. Benson has high financial leverage, and Dodd can expect its cost of capital to increase from 12% to 15% if the merger is undertaken. The cash price of Benson is $125,000.
Would you recommend the merger?
Would you recommend the merger if Dodd could use the $125,000 to purchase equipment that will return cash inflows of $40,000 per year for each of the next 10 years?
If the cost of capital did not change with the merger, would your decision in part b be different? Explain.
Firm Valuation
Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz, and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $8.1 million. The cash flows are expected to grow at 5 percent for the next five years before leveling off to 2 percent for the indefinite future. The cost of capital for Schultz and Arras is 9 percent and 7 percent, respectively. Arras currently has 3 million shares of stock outstanding and $25 million in debt outstanding.
What is the maximum price per share Schultz should pay for Arras?
Alpha is considering purchasing a competitor, Beta. Projected cash flows as a result of the merger are:
Year 1 $1,450,000
Year 2 $1,750,000
Year 3 $2,000,000
Year 4 $2,500,000.
In addition, Beta's year 4 cashflows are expected to grow at a constant rate of 6% after year 4. Beta'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%.
REQUIRED:
1. Compute for the maximum bid price that Alpha can offer in the acquisition.
2. How much is the net advantage/disadvantage to Alpha if it acquires Beta's 10,000,000 shares at the current market price of $9.
Chapter 18 Solutions
EBK PRINCIPLES OF MANAGERIAL FINANCE
Ch. 18.1 - Prob. 18.1RQCh. 18.1 - Prob. 18.2RQCh. 18.1 - Prob. 18.3RQCh. 18.2 - Prob. 18.4RQCh. 18.2 - Prob. 18.5RQCh. 18.3 - Prob. 18.6RQCh. 18.3 - What is the ratio of exchange? Is it based on the...Ch. 18.3 - Prob. 18.8RQCh. 18.3 - Prob. 18.9RQCh. 18.3 - Prob. 18.10RQ
Ch. 18.3 - Prob. 18.11RQCh. 18.3 - Prob. 1GFCh. 18.4 - Prob. 1FOECh. 18.4 - Prob. 18.12RQCh. 18.4 - Define an extension and a composition, and explain...Ch. 18.5 - Prob. 18.14RQCh. 18.5 - What is the concern of Chapter 71 of the...Ch. 18.5 - Indicate in which order the following claims would...Ch. 18 - Prob. 1ORCh. 18 - Prob. 18.1STPCh. 18 - Prob. 18.2STPCh. 18 - Prob. 18.1WUECh. 18 - Prob. 18.2WUECh. 18 - Prob. 18.3WUECh. 18 - Prob. 18.4WUECh. 18 - Prob. 18.5WUECh. 18 - Tax effects of acquisition Connors Shoe Company is...Ch. 18 - Tax effects of acquisition Trapani Tool Company is...Ch. 18 - Prob. 18.3PCh. 18 - Prob. 18.4PCh. 18 - Cash acquisition decision Benson Oil is being...Ch. 18 - Prob. 18.6PCh. 18 - Prob. 18.7PCh. 18 - Prob. 18.8PCh. 18 - Prob. 18.9PCh. 18 - Prob. 18.10PCh. 18 - Prob. 18.11PCh. 18 - Prob. 18.12PCh. 18 - Prob. 18.13PCh. 18 - Prob. 18.14PCh. 18 - Prob. 18.15PCh. 18 - Prob. 18.16PCh. 18 - Prob. 18.17P
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