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

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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.

#### Solution Summary

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

\$2.19

## Return on Equity vs. Return on Capital

You know that when expanding and investing in projects overseas as Acme plans to, it is essential to understand such things as Return on equity (ROE) and Internal rate of return (IRR).

Using Internet sources , Gather information on ROE and IRR.

Return on Equity vs. Return on Capital
Return on Equity Definition
Keep Your Eye on the ROE
IRR Example

Write a two to three paragraph explanation for each of these terms.

Include the advantages and disadvantages of using the ROE and the IRR when selecting projects to invest in overseas.

Then, select two companies with the same industry. Using the annual report information available on the company's website compute the ROE for each company.

Each of these three questions need an answer of a minimum length of 2-3 paragraphs.

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