Question

Stubborn Motors, Inc. is asking a price of $75 million to be purchased by Rubber Tire Motor Corp. Stubborn Motors currently has total cash flows of $2 million that are expected to grow by 1 percent annually for the next 4 years. Managers estimate that, because of synergies, the merged firm's cash flows will increase by $4 million in the first year after the merger and that these cash flows will grow by an additional 4 percent in years 2 through 4 following the merger. After the first four years, cash flows will grow at a rate of 1 percent annually indefinitely. The WACC for the merged firms is 10 percent. Calculate the NPV of the merger. (Enter your answer in millions. Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places.) NPV million Should Rubber Tire Motor Corporation agree to acquire Stubborn Motors for the asking price of $75 million? Ono yes

Answer 1

Data relating to Acquiree Company Cost of Merger (in million ) 75 Data relating to Synergies Cashflow for Year 0 (in million S) Synergy for Year 1 (in million S) Growth rate for next 4 years Growth rate for year 2 to year 4 WACC 10% Growth rate from year 5 onwards 1% WACC 10% Calculation of Present Value of Acquiree Company Cashflow PVF @ 10% Present Value Calculation of Present Value of Synergies Year Cashflow PVF @10% | Year Present Value 2.02 0.909090909 1.836363636 _ 0.909090909 3.636363636 2.0402 0.826446281 1.686115702 4.16 0.826446281 3.438016529 3 2.060602 0.751314801 1.548160781 4.3264 0.751314801 3.250488355 2.08120802 15.63642389 4.499456 0.683013455 3.07318899 PV of ACQUIREE COMPANY (in million S) 20.71 4.54445056 34.48800977 PV of SYNERGIES (in million $) 47.89 NPV of the MERGER (in million $) -6.41 NO, Rubber Tire Motor Corporation shall not agree to acquire since the NPV is negative.

L M N O P Q R Formula Sheet Data relating to Acquiree Company Cost of Merger (in million $) 175 Data relating to Synergies Cashflow for Year 0 (in million $) 2 Synergy for Year 1 (in million ) Growth rate for next 4 years 0 01 Growth rate for year 2 to year 4 0.04 WACC Growth rate from year 5 onwards 0.01 WACC 0.1 Calculation of Present Value of Acquiree Company Cashflow PVF @ 10% Present Value Calculation of Present Value of Synergies Cashflow PVF @ 10% Year Year Present Value =P8*(1+P10) =1/(1.1) AM19 =N19*019 =T8 =1/(1.1) S19 =T19*U19 =N19*(1+P10) =1/(1.1) M21 =N21*021 =T19*(1+T10) =1/(1.1) S21 =T21*U21 =N21*(1+P10)=1/(1.1) M23 =N23*023 =T21*(1+T10) =1/(1.1) S23 =T23*U23 =N23*(1+P10) =(N25*O23)/P12 =T23*(1+T10) =1/(1.1) S25 =T25*U25 PV of ACQUIREE COMPANY (in million S) LESUM(P19:P25) | =T25*(1+T12) =(T27*U25)/(T14-T12) PV of SYNERGIES (in million $) =SUM(V19:V27) NPV of the MERGER (in million $) =P27+V29-P6 NO, Rubber Tire Motor Corporation shall not agree to acquire since the NPV is negative.