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Autumn 2005- TBS 907- Tutorial 5 - Mergers and Acquisitions

Autumn 2005- TBS 907- Tutorial 5 - Mergers and Acquisitions...

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TBS 907- AUTUMN 2005 TUTORIAL 5 MERGER AND ACQUISTIONS Question 1 YAM Ltd (Y) has been evaluating the acquisition of Xavier Ltd (X). The annual expected cash flows of Y and X are respectively, $1.16 million per annum in perpetuity and $640,000 per annum in perpetuity. These cash flows are expected to be unaffected by the takeover. The systematic risk (beta) of Y is 0.75 and of X is 1.0. The risk free interest rate is 10 percent and the expected excess return on the market portfolio is 6 percent. Calculate the price at which X represents a zero NPV investment. Is it likely that Y’s shareholders will benefit from the takeover? Assume the information in the previous paragraph, except that the post takeover cash flow of the two companies is expected to be $1.95 million per annum in perpetuity. Is the acquisition likely to e of benefit to Y’s shareholders? Question 2 Crocodile Ltd. is considering the acquisition of Shark Finance. The values of the two companies as separate entities are $10 million and $5 million, respectively. Crocodile estimates that by combining
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