Explore BrainMass

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

This content was STOLEN from BrainMass.com - View the original, and get the solution, here!

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.

© BrainMass Inc. brainmass.com September 21, 2018, 12:45 am ad1c9bdddf - https://brainmass.com/business/adjusted-present-value/adjusted-present-value-value-company-equity-51021

Solution Summary

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