Purchase Solution

Adjusted Present Value: Calculate the value of Company B's equity to Company A

Not what you're looking for?

Ask Custom Question

Company A, is considering purchasing a smaller chain, Company B. Company A's analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4.

The Year 4 cash flow includes a horizon value of $107 million. Assume all cash flows occur at the end of the year. Company B is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, if it is undertaken and Company B would retain its current $15 million in debt and issue new debt in order to continue targeting a 30% debt level. The interest rate will remain the same. Company B's pre-merger beta is estimated to be 2.0, and its post-merger tax rate would be 34 percent. The risk-free rate is 8 percent, and the market risk premium is 4 percent. What is the value of Company B's equity to Company A?

Any assistance would be much appreciated.

Purchase this Solution
Solution Summary

In an Excel file, the solution shows the formulas and calculation to arrive at a response to the question.

Purchase this Solution
Free BrainMass Quizzes
Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Introduction to Finance

This quiz test introductory finance topics.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

View More Free Quizzes
Related BrainMass Solutions

  • Stock Price, Risk Free Assets, Debt to Equity Ratio, Value

    (c) Company B wants to achieve its long-term target Debt-to-Equity ratio of 0.5. How much debt or equity does Company B have to buy back? Calculate the value of the debt and equity after the buy-back.

  • Weighted Average Cost of Capital (WACC), Adjusted Present Value

    As a newly hired MBA in the capital budgeting division you have been asked to evaluate a new project using the Weighted Average Cost of Capital (WACC), Adjusted Present Value (APV), and Flow-to-Equity (FTE) methods.

  • NPV, unlevered beta, cost of debt, cost of equity

    Use the dividend discount model to calculate the cost of equity. see attached file The solution calculates NPV, unlevered beta, cost of debt, cost of equity

  • Company X: unlevered cost of equity

    - unlevered cost of equity - levered cost of equity and cost of capital for the post horizon period - using the adjusted present value approach, what is the value of operations to company X?

  • Merger Valuation: what will be Company B's WACC after acquisition by Company A

    Company A is considering buying company B, which has 500,000 shares outstanding worth $5 each & no debt. Company B's cost of equity is 12% & Company A's cost of equity is 15%.

  • Annual Report: Company Analysis

    WACC is the average risk that Canadian Tire faces. The WACC must be adjusted up to calculate the Net Present Value of a project that is more risky or adjusted down for a less risky project.

  • Cost of Capital Pfizer

    In the second process, company should calculate the proposition that debt and equity capital contributed to the entire enterprises through using the market value of total debt and equity (Nürk, 2009).

  • Cash Flow Valuation Model

    As usual with DCF models of this sort, the calculation of adjusted present value is straightforward but tedious. The first step in calculating an APV is to calculate a base NPV using the cost of equity as the discount rate.

  • Adjusted present value method undertake the project

    NOT be undertaken as its present value is negative and its APV is less than the initial cost of the investment The adjusted present value method for undertaking the project is determined.

View More Related Solutions