Module05Tutorial - August 2003 FIN2101 BUSINESS FINANCE II...

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August 2003 FIN2101 BUSINESS FINANCE II MODULE 5 - TAKEOVERS QUESTION 1 Luxe Foods is contemplating the acquisition of Valley Canning Company for a cash price of $180 000. Luxe currently has high financial leverage and therefore has a cost of capital of 15%. As a result of acquiring Valley Canning, which is financed entirely with equity, the firm expects its financial leverage to be reduced and its cost of capital therefore to drop to 10%. The acquisition of Valley Canning is expected to increase Luxe's cash inflows by $20 000 per year for the first 3 years and by $30 000 per year for the following 12 years. a) Determine whether the proposed cash acquisition is desirable. b) If the firm's financial leverage would actually remain unchanged as a result of the proposed acquisition, would this alter your recommendation? Support your answer with numerical data. QUESTION 2 Firm A is planning to acquire Firm B for $140 million cash. The values of the two companies as separate entities are $200 million and $100 million respectively. Firm A estimates that by combining the two companies it will increase operating cash flows by $5 million annually in perpetuity. If the relevant cost of capital is 20%, what is the NPV of the merger to Firm A's shareholders? QUESTION 3
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This note was uploaded on 12/06/2011 for the course BUSINESS Finance taught by Professor Qilei during the Summer '11 term at Tianjin University.

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Module05Tutorial - August 2003 FIN2101 BUSINESS FINANCE II...

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