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

Long-run aggregate supply curve, Suppose the potential level of real domest...

Suppose the potential level of real domestic output (Q) for a hypothetical economy is $160 and the price level (P) initially is 200. Use the following short-run aggregate supply

Explain consumer price index, Q. Explain Consumer Price Index? CPI is a...

Q. Explain Consumer Price Index? CPI is a price index of a particular basket known as the CPI-basket. CPI-basket comprise essentially all the servicesand goods consumed in a co

The Business Cycle, I would like to know one of the external determinants i...

I would like to know one of the external determinants in Spain''s recovery, please?

What are the two main costs of economic growth, What are the two main costs...

What are the two main costs of economic growth The two main costs of economic growth are resource depletion and environmental damage. Economic activity needs factor inp

Var modelling, However, these results should be approached with due caution...

However, these results should be approached with due caution. The limitations and problems associated with VAR modelling have been outlined in this paper, therefore these observati

Potato chip industry in the northwest, In 2007, the potato chip industry in...

In 2007, the potato chip industry in the Northwest was competitively structured and in long-run competitive equilibrium; firms were earning a normal rate of return and were competi

Strategic vs. tactical approaches, Consider Gold-Bernstein's Integration ro...

Consider Gold-Bernstein's Integration roadmap (p. 18).  Construct two business examples, one that clearly calls for a strategic integration effort and the other that call

Percentage must this cost be reduced, Cd players are produced on an automat...

Cd players are produced on an automated assembly line process. The standard cost of CD players is 150.00 per unit. The sales price is $300.00 per unit. To achieve a 10 percent mult

Fiscal stimulas, Suppose the consumption function is C = $500 billion + 0.5...

Suppose the consumption function is C = $500 billion + 0.55Y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially

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

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