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You have been given the job of evaluating the following merger candidate. You have collected the following cash flow for the acquisition candidate...

1.    You have been given the job of evaluating the following merger candidate. You have collected the following cash flow for the acquisition candidate for the proposed merger (in millions):

Year                                                                1                              2                               3                               4                               5__

Cash flows now                                       80                           85                             105                          145                          180

Additional cash flows with merger 40                           90                             100                          125                          150

Total cash flows with merger         120                          175                          205                          270                          330


Risk free rate of return                                                                                                                 3.5%

Beta for this project (the company after merging)                                                         1.5          

Market risk premium                                                                                                                    5.5%      

Pre-tax cost of debt                                                                                                                         6.6%

Marginal tax rate                                                                                                                             22%

Number of shares outstanding for the target company (millions)                         55           

Current market price per share for the target company                                              $38         

Percentage of the acquisition financed with debt                                                          50%

Percentage of the acquisition financed with common equity                                                     50%       


What is the after tax cost of debt?


What is the after tax cost of common equity


What is the weighted average cost of capital for this acquisition candidate?


What is the maximum price per share you are willing to pay for this candidate?


Based on the numbers above, would you pursue this candidate?

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(i) After tax cost of debt Kd = 5.148 % (ii) After tax Cost of... View the full answer

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