Reference no: EM132594880

Skyline firm is considering a merger with Skyline Corp. Skyline has 10,000,000 shares outstanding and a target capital structure of 30% debt. Skyline's debt interest rate is 9% on $65M in debt. The risk-free interest rate is .35% and the market risk premium is 5%. Both firms are in the same tax bracket of 30%. Skyline's (levered) equity beta is 1.50. The current value of Skyline's stock is $60 per share. You estimate synergies will produce the additional income given below. After year 2, the tax shields and free cash flows will grow by 5% and the combined firm will maintain the 30% debt ratio.

1) Use the adjusted present value (APV) to find the per share value of Skyline to your firm. Use the WACC to get the horizon value (HV). Use M&M no tax relationship to get the unlevered cost of capital.

Income Statement:
                                        Y1:                          Y2:                   Y3:
EBIT:                               20                      25m                   28m
Interest Expense          3                      3m                      3m
EBT                                  17                   22m                   25m
Taxes             5.1 6.6 7.5                 
Net Income    11.9 15.4 17.5
Net Investment In Operating Capital: 2 2.2m 2.5m

2)  If Skyline Corporation were to consider the possible synergies of the merger, is Skyline Corp. more likely to want a stock or cash offer?

Additional Information: Sales are $35 million for the most recent year. Cost of goods sold are $10 million. Inventory is $ 4 million Gross margin is 15%. EBIT is 2 million. Tax Rate is 35%. Total Assets are $25 million. Retained Earnings are $6 million. Total Liabilities are $15 million.

Additional possibly helpful info: Debt yield: 5% Beta- .8, Market Cap- 25 million, Stock Price - $23, T-bond (risk-free rate) - 1.50%.

Please indicate any assumptions if any additional assumptions were made.