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X Corporation is interested in acquiring Y Corporation. Y has 1 million shares outstanding and a target capital structure consisting of 20% debt. Its debt interest rate is 8%. Assume that the risk-free rate of interest is 3% and the market risk premium is 8%. Both X and Y face a 40% tax rate.

Y free cash flow is $5 million and is expected to grow at a constant rate of 3% per year; its beta is 0.9. If Y has $4.15 million in debt and X wants to bid at least 10% higher than Y's current stock price to increase the likelihood of shareholders accepting the merger, what is minimum amount X should bid per share?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92359654

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