Find out the expected return on capital, Macroeconomics

Assignment Help:

Butthole Industries is buying out Avengers, Inc.  Butthole and Avengers both have market capitalizations equal to their fair value or the present value of their net cash flows.  Butthole generates $45M per year in net cash flows but has no growth.  Avengers is expected to generate $25M in net cash flows next year. Also, grow at 15% per year after.  The return on capital of both companies over the past years:

Return on Capital

Butthole

Avengers

Year 1

-20.5%

45.8%

Year 2

41.1%

-5.8%

Year 3

10.5%

20.9%

Note that the relevant discount rate for each firm is the "average" return on capital.

A.  If past history is a good indicator of future performance, what are the expected return on capital and standard deviation of return on capital for the merged entity?

B.  In which of the two major dimensions this merger could possibly help Butthole: boosting the return or reducing the risk?  Prove your point quantitatively.

 


Related Discussions:- Find out the expected return on capital

Net profit advertisement relationship, In 2009, ABC Company made $2M of net...

In 2009, ABC Company made $2M of net profit and spent $100,000 on advertisement. In 2010, it made $2.5M of net profit and spent $150,000 of advertisement. Based on this information

What are the contents in the market strikes back, What are the contents in ...

What are the contents in the market strikes back? a. Price controls • Price ceiling • Price floor b. Quantity controls quota c. Excise tax d. Inefficiency

Pareto optimality, Diagramatic explanation of pareto optimality

Diagramatic explanation of pareto optimality

Elucidate the factors of global demand and supply, Many economists and mark...

Many economists and market analysts are avid followers of the BALTIC DRY INDEX (BDI) as a forward looking mechanism that may shed a bit of light on the evolution of global economic

Why monopoly is broken into a number of competitive parts, A monopoly is br...

A monopoly is broken into a number of competitive parts. Predict the changes in output and price which are likely to take place. Making the basic assumptions that,  1) The i

Limitations of rational expectations school, Limitations of the theory of r...

Limitations of the theory of rational expectations: Critics of this theory note that if policy makers have more information about the economy or their own actions than d

Ketch the bakerys average cost curve, A bakery has fixed costs of $10 per d...

A bakery has fixed costs of $10 per day and variable costs of $1 per loaf. Its oven can handle up to 50 loaves a day and it is impossible to obtain additional capacity. Sketch the

Demographic features in development, DEMOGRAPHIC FEATURES IN DEVELOPMENT: ...

DEMOGRAPHIC FEATURES IN DEVELOPMENT: We have learned in the previous unit that human resources play a significant role in generating aggregate flow of goods and services. The

interpret and explain the nmr spectrum, Treatment of Na2PdCI4 with 3-chlor...

Treatment of Na2PdCI4 with 3-chloro-2-methyl-1-propene under an atmosphere of CO yields the dimer [(11 3 - C 4 H 7 )PdClb (A). The 1H NMR spectrum of A at 298 K shows 3 signals: a

Project to build a factory, Suppose there are two investors. One has a proj...

Suppose there are two investors. One has a project to build a factory; the other has a project to visit casino and gamble on roulette. Which investor has a greater incentive to iss

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd