Net new investment in operating capital-interest expense

Assignment Help Financial Management

Reference no: EM131537300

Juicers Inc. is thinking of acquiring Fast Fruit Company. Juicers expects Fast Fruit's NOPAT to be $9 million the first year, with no net new investment in operating capital and no interest expense. For the second year, Fast Fruit is expected to have NOPAT of $25 million and interest expense of $5 million. Also, in the second year only, Fast Fruit will need $10 million of net new investment in operating capital. Fast Fruit's marginal tax rate is 40%. After the second year, the free cash flows and the tax shields from Fast Fruit to Juicers will both grow at a constant rate of 4%. Juicers has determined that Fast Fruit's cost of equity is 17.5%, and Fast Fruit currently has no debt outstanding. Assume that all cash flows occur at the end of the year, Juicers must pay $90 million to acquire Fast Fruit. What it the NPV of the proposed acquisition? Note that you must first calculate the value to Juicers of Fast Fruit's equity.

Reference no: EM131537300

Questions Cloud

What is the present worth of the purchase : What is the present worth of the purchase?

Compute the capital component costs : Compute the capital component costs for each of the capital components (debt, preferred stock and equity using retained earnings).

How is the cost of merchandise sold calculated : What is the major difference between the income statement for a merchandising business and a service business?

Name two key drivers for methodist growth in the 19 century : Slavery has been referred to as "America's original sin". The responses to slavery (including segregation) and the sectionalism (north/south).

Net new investment in operating capital-interest expense : Juicers expects Fast Fruit's NOPAT to be $9 million the first year, with no net new investment in operating capital and no interest expense.

Where is the beginning balance of retained earnings found : What financial information does a statement of stockholders' equity report?

What is the net present value of project : What is the net present value (NPV) of the project if the company’s cost of capital is 9.41 percent?

Demonstrate logical structure and layout of the organization : ECM34KM - KNOWLEDGE MANAGEMENT ASSIGNMENT. Identify and present the issues/challenges within the context of the assigned task and from this demonstrate a logical structure and layout of the organization

Find the portfolio beta and required return : Find the portfolio’s expected return. Find the portfolio’s beta and required return. Identify whether the portfolio is undervalued, fair valued.

User Account

All Pages