Question

Consider the following acquisition data regarding Sunny Squirrel Fabricators Inc. and Red Box Builders Inc.: Sunny Squirrel Fabricators Inc. is considering an acquisition of Red Box Builders Inc. Sunny Squirrel Fabricators Inc. estimates that acquiring Red Bo will result in incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company Data Collected (in millions of dollars) Year 1 Year 2 14.4 3.3 39.0 119.7 Year 3 18.0 EBIT Interest expense Debt Total net operating cap 12.0 33.0 42.0 ital 122.0 Red Box is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements. . Red Box currently has a $24.00 million market value of equity and $15.60 million in debt. * The risk-free rate is 4.5% with a 6.60% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity rsL of 11.10% Red Box's cost of debt is 6.50% at a tax rate of 35%. * The projections assume that the company will have a post-horizon growth rate of 4.50%. .Current total net operating capital is $114.0, and the sum of existing debtand debt required to maintain a constant capital structure at the time of acquisition is $30 million. The fim has no nonoperating assets, such as marketable securities. With the given information, use the free cash flow to equity (FCFE) approach to calculate the following values involved in the merger analysis Value FCFE horizon value Value of FCFE The estimated value of Red Box'so Red Box's shareholders will perat tions after the merger is than the market value of Red Box's equity. This means that the wealth of if it merges with Sunny Squirrel rather than remaining as a stand-alone corporation. True or False: The horizon value in the FCFE approach is different from the horizon value in the APV approach. The horizon value in the FCFIE approach is only for equity, whereas the horizon value in the APV approach is for the total value of operations. Session O False 59:3

Answer 1

True

Estimated value of beed box operation after the merger is equal than the market value of red box equality.