Question

ABC Inc is looking to launch an acquisition of a target for $3 billion. The target is expected to generate cash flows for five years. Table 1 below shows the expected cash flows of the target along with the acquisition cost. Table 2 shows the financial data required to generate a discount factor for the cash flows. 1. Calculate the discount rate (WACC) for the acquisition. 2. Evaluate the deal using NPV, IRR, and Payback. Consider the following: Table l Cost of acquisition: $3.0 billion Cash flow, Cash flow, 2 Cash flow, 3 Cash flow, 4 Cash flow5 Table 2 Debt/Equity Target cost of debt | 12.00% Tax rate Treasury rate Beta with SPX 0.40 $550 million $700 million $825 million $1.2 billion | $1.5 billion | 30% 4.0% 1.14 | 10.0% | Return on SPX Se calculate the firm's cost of capital using the information in Table 2. Find the NPV and IRR on the proposed acquisition. You are analyzing an acquisition using either 100% debt or 100% equity as the only two financing solutions. You perform an analysis of capital sources and the impact on the firm's earnings for the $3 billion deal. ABC Inc. currently has 800 million shares outstanding and a market price of $50 per share. The firm has a cost of debt (before tax) of 7 percent. The target firm has $800 million in debt carrying a 12% rate that will be assumed by ABC Inc. You run an analysis that includes a five-year projection for the combined company to determine EBIT in Table 3. Using either all equity ($50 issuance price) or all debt (7%) to buy Target Co., assuming no flotation costs in this model, and assuming 30% tax rate, when is the deal accretive to earnings and how should the firm finance the acquisition? 3, Table 3. Combined projection of EBIT for ABC Inc and Target Company & EPS for ABC Alone Without Acquisition Year 0 Year 2 Year 3 Year 4 Year 5 ear Combined EBIT 4,500,000,000 4.455,000,000 4.722.300.000 Without ABC Inc Acquisition EPS 5.194,530,000 5.713,983,0006,171.101,640 $2.75 $2.97 S3.21 $3.46 $3.74 4.04

Please show the work..