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Would you recommend the merger

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Question - 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.

Required -

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: EM132626655

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