ZuoTi.Pro
Question

1 question (60%) The Prime Corporation is viewed as a possible takeover tar- get by TVC Enterprises, Inc. Currently, Prime uses 25 percent debt in its capital structure, but TVC plans to increase the debt ratio to 40 percent if the acquisition is consummated Primes after-tax cost of debt is 10 percent, which should hold constant. The c after the acquisition is expected to be 20 percent. The current market value of Primes debt outstanding is $30 million, all of which will be assumed by TVC. TVC intends to pay S150 million in cash and common stock for all of Primes stock in addition to assu its debt. Currently, the market price of Primes common stock is S125 million. Selected items from Primes financial data are as follows: 2004 2005 2006 2007 THEREAFTER (MILLIONS) $425 65 40 50 $300 $335 $370 $400 Net sales Administrative and selling expenses Depreciation Capital expenditures 40 25 30 50 30 37 58 35 45 62 38 48 In addision, the cost of goods sold runs 60 percent of sales, and the marginal tax rate is 34 per- cent. Compute the NPV of the acquisition. Required: a. Compute NPV of the acquisition. b. Make decision to acquire or not. Explain
business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Assuming that the deal is considered in the year 2003. This is important since all present value calculations are dependent on the time stamp. Since there is nothing else mentioned in the question prompt itself, we are making this assumption.

21 Tax Kd Debt Ratio 34% 20% 10% after tax 2004 2005 2006 2007 Thereafter (TV Millions 40% 60% Net Sales SG&A Depreciation Capex 300.00 S 335.00 S 370.00 S 400.00 $ 62.00 $ 38.00 $ 48.00 $ 425.00 65.00 40.00 50.00 % Equity $ 40.00$ 50.00 $ 58.00 S $ 25.00 S 30.00 S 35.00 S S 30.00 S 37.00 S 45.00S WACC 14.0% O EBIT EBIT(1-T) 320.00 $155.10 S168.30 S 182.82 S 198.00$211.20 235.00 S 255.00 S 277.00 S 300.00 $ Discounting Cash flows at WACC PV(CF) Terminal Value 1,437.1 3 Add Depreciation $180.10 $198.30 S 217.82 S 236.00$ 4 Less Capex 251.20 $ 150.10 $ 161.30 S 172.82 S 188.00$ 201.20 $ 483.7 Net Working Capital - assumed 5 constant PV S 746.41 7 FCFF 8 PV factor 201.20 0.519 $150.10 161.30 172.82 $ 188.00 $ $1,230.15 S 180.00 D+E 0.769 0.675 Value Today Price paid 0.877 0.592 NPV 1,050.15

EBIT is operating income , calculated as Net sales - Depreciation - SG&A

PV(CF ) = All discounted FCFs ( till 2007) summed up together

Value Today = PV (CF ) + PV (TV)

Thus the acquisition should be made.

0 0
Add a comment
Know the answer?
Add Answer to:
1 question (60%) The Prime Corporation is viewed as a possible takeover tar- get by TVC...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • 1 question (60%) Prime Corporation is viewed as a possible takeover tar- get by TVC Enterprises,...

    1 question (60%) Prime Corporation is viewed as a possible takeover tar- get by TVC Enterprises, Inc. Currently, Prime uses 25 percent debt in its capital structure, but TVC plans to increase the debt ratio to 40 percent if the acquisition is consummated. Prime's after-tax cost of debt is 10 percent, which should hold constant. The cost of equity after the acquisition is expected to be 20 percent. The current market value of Primes debt outstanding is $30 million, all...

  • ㄈ 그 . ) The Brown Corporation is viewed as a possible takeover target y Cicron,...

    ㄈ 그 . ) The Brown Corporation is viewed as a possible takeover target y Cicron, Inc. Currentdy, Brown uses 20 percent debt in is cupital structure, but Cicron plans o increase the debt ratio to 25 percent if the scquistion is consummated The fer-tar cost of debt capital for Brown is estimated to be 8 percent, which holds constant under either apital structure. The cost of equty sfter th acquisition is eapected to be 22 percent. The current mar...

  • Free cafoa valuation) The Brown Corporation is viewed as a posible takeover turget y Cicron, Inc....

    Free cafoa valuation) The Brown Corporation is viewed as a posible takeover turget y Cicron, Inc. Curentdy, Brown uses 20 percent debt in its capital structure, but Cicron plans to increase the debt ratio to 25 percent if the acquisition is consummated. The after-tax cost of debt apital for Brown is estimated to be 8 percent,which holds constant under either capital structure. The cost of equity fer the acquisition is eapected to be 22 percent. The current mar- ket value...

  • Freeca-fro vaaion) The Brown Corporationis viewed as a possble takeover burget y Cicron, Inc. Currentdy, Brown...

    Freeca-fro vaaion) The Brown Corporationis viewed as a possble takeover burget y Cicron, Inc. Currentdy, Brown uses 20 percent debt in is cupital structure, but Cicron plans o increase the debt ratio to 25 percent if the scquistion is consummated The fer-tar cost of debt capital for Brown is estimated to be 8 percent, which holds constant under either apital structure. The cost of equty after th acquisition is eapected to be 22 percent. The current mar ket value of...

  • URGENT! 37 min left Pre re oswer uget eecab y Clicron, Inc. CurreadyBrown uses 20 percent...

    URGENT! 37 min left Pre re oswer uget eecab y Clicron, Inc. CurreadyBrown uses 20 percent debt in is capital structure, but Cicron plans to increae the debt ratio to 25 percent if the scquistion is consummated The after-tar cost of debt capital for Brown is estimated to be 8percent, which holds constant under either apital structure. The cost of equity sfer the acquisition is expected to be 22 percent. The curent ket value of Brown' oustanding debt is S75...

  • SMPrime Holdings is a closely held corporation with a capital structure composed entirely of common stock...

    SMPrime Holdings is a closely held corporation with a capital structure composed entirely of common stock and retained earnings. The stockholders have an agreement with the company that states the company will purchase the stock of a shareholder should a shareholder want to sell his or her holdings in the company. The agreement states that the stock will be purchased at a price equal to the stock's previous year-end book value per share. Early in October 2017, Mrs Bean, a...

  • Dabney Electronics currently has no debt. Its operating income (EBIT) is $30 million and its tax...

    Dabney Electronics currently has no debt. Its operating income (EBIT) is $30 million and its tax rate is 40 percent. It pays out all of its net income as dividends and has a zero growth rate. It has 2.5 million shares of stock outstanding. If it moves to a capital structure that has 40 percent debt and 60 percent equity (based on market values), its investment bankers believe its weighted average cost of capital would be 10 percent. What would...

  • Dabney Electronics currently has no debt. Its operating income (EBIT) is $30 million and its tax...

    Dabney Electronics currently has no debt. Its operating income (EBIT) is $30 million and its tax rate is 40 percent. It pays out all of its net income as dividends and has a zero growth rate. It has 2.5 million shares of stock outstanding. If it moves to a capital structure that has 40 percent debt and 60 percent equity (based on market values), its investment bankers believe its weighted average cost of capital would be 10 percent. What would...

  • QUESTION 3 (a) A company finances its operations with 40 percent debt and 60 percent equity....

    QUESTION 3 (a) A company finances its operations with 40 percent debt and 60 percent equity. The annual yield on the company’s debt is rd = 10% and the company’s tax rate is T = 30%. The company’s common stock trades at Po = K55 per share, and its current dividend of Do =K5 per share is expected to grow at a constant rate of g = 10% a year. The flotation cost of external equity, if it is issued,...

  • Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a...

    Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.60 (given its target capital structure). Vandell has $8.10 million in debt that trades at par and pays an 7.8% interest rate. Vandell’s free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 4% a year. Both Vandell and Hastings pay a 40% combined federal...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT