Reference no: EM132904716

McLaren Mountain Breweries (MMB) is considering an acquisition of Limmerick Lane Markets (LLM). Limmerick currently has a cost of equity of 9%. 20% of its financing is in the form of 5% debt. The current market value of LLM is $600 million and it has 20 million shares outstanding. The current market value of MMB is $3500 million and it has 50 million shares outstanding.

After the acquisition, McLaren Mountain expects Limmerick Lane to have the following free cash flows and interest payments for the next three years (in $ millions):

Year 1 FCF 10.00 Int expense 25.00
Year 2 FCF 20.00 Int expense 22.00
Year 3 FCF 30.00 Int expense 18.25

After three years, the free cash flows are expected to grow at a constant rate of 4% and the capital structure will stabilize at 40% debt with an interest rate of 6%. Assume a tax rate of 30%. If you need to make any additional assumptions, please state them.

Problem a) What is Limmerick Lane's cost of unlevered equity?

Problem b) What are its levered cost of equity and cost of capital for the post-horizon period?

Problem c) Using the adjusted PV method, what is Limmerick Lane's value to McLaren Mountain?

Problem d) What is the synergy that MMB is estimating for the acquisition of LLM?

Problem e) MMB is contemplating a cash offer of $700 million for LLM. What is the cost of cash acquisition?

Problem f) As an alternate, MMB is considering a share offer. It would be offering the shareholders of LLM0.5 share of MMB for each share of LLM. What is the cost of this alternative to MMB?

Problem g) Compare the two alternatives - cash versus stock. Which one has a higher NPV? Advice MMB on the best method of offer?