Question

4. Merger valuation and discounted cash flows Aa Aa When a merger takes place between two companies to form a single firm, the target company to operate as a separate identity. Consider the following scenario: Universal Drapers Inc. is considering an acquisition of General Forge and Foundry Co. (GFF), and estimates that acquiring GFF will result in incremental after-tax net cash flows in years 1-3 of $16.0 million, $24.0 million, and $28.8 million, respectively. After the first three years, the incremental cash flows contributed by the GFF acquisition are expected to grow at a constant rate of 6% per year. Universal's current beta is 1.20, but its post-merger beta is expected to be 1.56. The risk-free rate is 3%, and the market risk premium is 5.10% Based on this information, complete the following table by selecting the appropriate values: Value Post-merger cost of equity Projected value of the cash flows at the end of three years The value of General Forge and Foundry Co. (GFF)'s contribution to Universal Drapers Inc General Forge and Foundry Co. (GFF) has 3 million shares of common stock outstanding. What is the largest tender offer Universal Drapers Inc. should make on each of General Forge and Foundry Co. (GFF)'s shares? $134.81 $202.21 $168.51 $202.22

Drop down answers:

1. continues, does not continue

2. 12.73%, 9.12%, 10.96%, 8.70%

3. 340.74 million, 508.83 million, 580.65 million, 612.52 million

4. 505.54 million, 606.65 million, 657.2 million, 404.43 million

Answer 1

1) Does not continue 2) Rf 3% Rm-Rf 5.10% Beta 1.56 10.96% Re 3) Yr 1 2 Cash flow 16 24 28.8 TV 615.98 Total 16.00 24.00 644.78 4) Value 505.93 Share price 5) 168.51

So approximately 3) 612.52 million

4) 505.54 million