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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

MERGER ANALYSIS Use the spreadsheet model to rework problem 21-6, and then answer the following question:

a. Suppose GCC has 120,000 shares outstanding. What is the maximum per-share price TransWorld should offer for GCC?

a.

Summary Introduction

To Determine: The maximum share price.

Introduction: A merger is the mix of two organizations into one by either shutting the old entities into one new entity or by one organization engrossing the other. In other terms, at least two organizations are united into one organization to form a merger.

Explanation

Determine the appropriate discount rate for valuing the acquisition

DiscountRate(rs)=[RiskfreeRate(rf)+Beta(β)×MarketRiskPremium(rm)]=[8%+1.50×4%]=[8%+6%]=14%

Therefore the appropriate discount rate for valuing the acquisition is 14%.

Determine the net cash flow from year 2015 to 2018

Using a excel spreadsheet, the net cash flow from year 2015 to 2018 is determined as $61.43 for year 2015, $69.75 for year 2016, $71.66 for year 2017 and $74.75 for year 2018.

Excel Spreadsheet:

Excel Workings:

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