Alpha is considering purchasing a competitor, Beta. Projected cash flows as a result of the merger are: Year 1 $1,450,000 Year 2 $1,750,000 Year 3 $2,000,000 Year 4 $2,500,000. In addition, Beta's year 4 cashflows are expected to grow at a constant rate of 6% after year 4. Beta's post merger beta is estimated to be 1.2 and its post-merger tax rate is 40%. The risk-free rate is 8% and the market risk premium is 4%. REQUIRED: 1. Compute for the maximum bid price that Alpha can offer in the acquisition. 2. How much is the net advantage/disadvantage to Alpha if it acquires Beta's 10,000,000 shares at the current market price of $9.

Alpha is considering purchasing a competitor, Beta. Projected cash flows as a result of the merger are: Year 1 $1,450,000 Year 2 $1,750,000 Year 3 $2,000,000 Year 4 $2,500,000. In addition, Beta's year 4 cashflows are expected to grow at a constant rate of 6% after year 4. Beta's post merger beta is estimated to be 1.2 and its post-merger tax rate is 40%. The risk-free rate is 8% and the market risk premium is 4%. REQUIRED: 1. Compute for the maximum bid price that Alpha can offer in the acquisition. 2. How much is the net advantage/disadvantage to Alpha if it acquires Beta's 10,000,000 shares at the current market price of $9.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 9P

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