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Suppose company A, with excess cash is considering the acquisition of a regional company B. Company A estimates of B's earnings potential if it comes under A's management (in millions of dollars). The interest expense listed here includes the interest (1) on B's existing debt, (2) on new debt that A would issue to help finance the acquisition, and (3) on new debt expected to be issued over time to help finance expansion within the new division. The retentions represent earnings that will be reinvested within the B division to help finance its growth Company B currently uses 27.5% debt financing, and it pays federal-plus-state taxes at a 32% rate security analysts estimate B's beta to be 1.17 If the acquisition were to take place. A would increase B's debt ratio to 35%, which would increase B's beta to 1.38. Further, because A is highly profitable, taxes on the consolidated firm would be 40% Depreciation cash flows would have to be reinvested within the division to replace worn-out equipment so they would not be available to A's shareholders. You estimate the risk-free rate to be 3.5% and the market risk premium to be 6.75%. You also estimate that cash flows after 2021 will grow at a constant rate of 4 5% The after tax cost of debt is 6.5%. The table presents estimates of B's data for merger analysis.
One-year interest rates are 5 percent. Assume that the pure expectations theory holds regarding the term structure.
Financial management provides a framework for pursuing synergy between the functional responsibilities and financial resources of the business organisation.
Fred Nickerson, gold digger, plans to build a mining operation on his farm. The initial investment will be $100,000 and each year Fred expects to pay $5,000 to maintain the equipment. What is the present value of Fred’s entire business venture, assum..
A sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility of the desired size and to attain capacity operations would cost 450 million in present value terms. Alternatively, t..
Negative Growth. Antiques ‘R’ Us is a mature manufacturing firm.
Suppose that you borrow ?$40,000 at 12?% compounded monthly over six years. Knowing that the12?% represents the market interest? rate, you realize that the monthly payment in actual dollars will be ?$782.01 If the average monthly general inflation ra..
Investment A has the following cash flows: 200,200,300,200 200 Investment B has the following cash flows: 300,300,300,300,300 Both investments have a cost of 350 initially. Indicate which registers, financial or cash flow, can be used to determine th..
The expected return on the market portfolio is 17 percent, and the return on the risk-free security is 5 percent. What is the expected return on a portfolio with a beta equal to 0.5?
Red Company purchased an apartment building on November 1, 2015, for $7,000,000. Determine the cost recovery deduction for 2015. Pink Corporation purchased a business asset (seven-year property) on October 18, 2015, at a cost of $30,000. This is the ..
James Fromholtz is considering whether to invest in a newly formed investment fund. The fund’s investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund’..
Suppose you are committed to owning a $195,000 Ferrari. If you believe your mutual fund can achieve a 13 percent annual rate of return and you want to buy the car in 10 years on the day you turn 30, how much must you invest today?
The following table provides the Dow Jones Industrial Average (DJIA) opening index value on the first working day of 1994-2013:
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