Merger valuation and discounted cash flowswhen a merger, Ask an Expert

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Merger valuation and discounted cash flows

When a merger takes place between two companies to form a single firm, the target company (continues/does not continute) to operate as a seperate identity.

Consider the following scenario:

Ziffy Corp. is considering an acquisition of Tull Industries., and estimates that acquiring Tull will result in incremental after-tax net cash flows in years 1-3 of $16.0 million, $24.0 million, and $28.8 million, respectively.

After the first three years, the incremental cash flows contributed by the Tull acquisition are expected to grow at a constant rate of 4% per year. Ziffy's current beta is 1.20 , but its post-merger beta is expected to be 1.56. The risk-free rate is 5.5%, and the market risk premium is 7.60%.

Based on this information, complete the following calculations:

Post-merger cost of equity =

Projected value of the cash flows at the end of three years =

The value of Tull Industries' contribution to Ziffy Corp. =

Tull Industries has 5 million shares of common stock outstanding. What is the largest tender offer Zippy Corp. should make on each of Tull Industries' shares?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92744226

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