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Would you recommend the merger

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Reference no: EM131110415

Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase its cash inflows by $25,000 for each of the next 5 years and by $50,000 for each of the following 5 years. Benson has high financial leverage, and Dodd can expect its cost of capital to increase from 12% to 15% if the merger is undertaken. The cash price of Benson is $125,000.

a. Would you recommend the merger?

b. Would you recommend the merger if Dodd could use the $125,000 to purchase equipment that will return cash inflows of $40,000 per year for each of the next 10 years?

c. If the cost of capital did not change with the merger, would your decision in part b be different? Explain.

Reference no: EM131110415

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