Reference no: EM132972104
Questions -
Q1) KLM Corp., is analyzing the possible acquisition of ANN Corp. Both companies believe the acquisition will increase its total after-tax annual cash flows by $[(3+1)*1,000,000 + 867,985] indefinitely. The current market value of ANN Corp is $[(3+4+5+8)*450,000] and that of KLM Corporation is $[(3+4+5+12)*650,000]. The appropriate discount rate for the incremental cash flows is [(8+18)/2]%. KLM Corp is trying to decide whether it should offer [(3+4+40)]% of its stock or $[(3+4+5+15)*550,000] in cash to ANN's shareholders.
A. What is the NPV of the stock offer?
B. What is the NPV of the cash offer?
Q2) Company X has an investment opportunity in Europe. The project costs €[(3+4+5+3) *3,000,000] and is expected to produce cash flows of €[(4+5+16) * 1,000,000] in Year1, €[(5+8+17) * 1,000,000] in Year 2, and €[(5+8+3+6) * 1,000,000] in Year 3. The current spot exchange rate is $[(3+4+3)/4]/€ and the current risk-free rate in the United States is [3+3]%, compared to that in Europe of [3.5+4]%. The appropriate discount rate for the project is estimated to be [8+5]%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €[(3+4+3) *1,250,000].
What is the NPV of the project?
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