Result in incremental net cash flows

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ABC is considering purchasing a smaller chain, XYZ software. ABC’s financial analysts project that the merger will result in incremental net cash flows of $5.5 million in Year 1, $6.5 million in Year 2, $8.5 million in Year 3, and $15.5 million in year 4. Interest tax savings after the merger are estimated to be $1.8 million for each of the next 4 years. The expected cost of capital will be 10.5%, and the company expects to experience a normal growth of 6% starting at the beginning of the fifth year. XYZ’s outstanding debt is estimated to be $40 million, and the post merger beta is estimated to be 1.50. The risk free rate is 3.5 percent, and the market returns are 10 percent. What is the value of XYZ Software to ABC software?

Reference no: EM131991161

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