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Calculating company value before and after merger.

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1) Use table below for figuring free cash flows of acquisition target organization. Free cash flows include forecasted synergies.
Buyer has WACC 20%
What is the value of the acquisition target? Please show calculations.
Free Cash Flow
Year 1 $99,000
Year 2 102,000
Year 3 170,000
Year 4 150,000
Year 5 100,000

2)Use table below to figure.
Assume merger gains $25,000,000
Combined company=30 million shares @ $100/share
Combined company after the merge P/E ratio? Please show calculations.
($ in millions, except per share) Buyer Seller
Price-Earnings Ratio (P/E) 20 12
Shares Outstanding 20 20
Price per Share $100.00 $45.00

3) Variables involved in this free cash flow problem:
Forecast for an organization is to generate EBIT of $500,000 over 5 years.
Depreciation is forecasted to be $150,000 /year
Corporate tax rate 40%
Net working capital increase in year one of $50,000
Decrease in year 5 of $25,000
Figure the free cash flow from the project in year one. Please show all calculations.

4) Use table below to figure working capital:
a)During the year what was change in working capital?
b) sales= $52,000
costs=$39,000
depreciation 0%
Taxes 0%
Figure cash flow. Please show calculations.
Beginning End of Year
Current Assets
Accounts Receivable $24,000 $23,000
Prepaid Expenses 5,000 6,000
Inventory 12,000 12,500
Fixed Assets 100,000 99,000
Current Liabilities
Accounts Payable 14,500 16,500
Accrued Liabilities 7,500 6,500

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Solution Summary

The solution presents detailed steps for calculating the value of a company before and after its merger with another company.

The solution also shows how to calculate the free cashflow for the company.

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See Also This Related BrainMass Solution

Mergers, LBO's, Divestitures and Business Failure

Please see the attachment.
Connor Shoe Company is contemplating the acquisition of Salinas Boots, a firm that has shown large operating tax losses
over the past few years. As a result of the acquisition, Connors believes that the total pretax profits of the merger will not change
from their present level for 15 years. The tax loss carry-forward of Salinas is $800,000. and the Connors projects that its annual
earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings per are assumed to fall
within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm
is in the 40% tax bracket.

A. If the Connors does not make the acquistion, what will the company's tax liability and earnings after taxes each year
over the next 15 years?

B. If the acquisition is made, what will be the company's tax liability and earnings after taxes each year over the next
15 years?

C. If Salinas can be acquired for $350,000 in cash, should Connors make the acquisition, judging on the basis of
tax considerations?(Ignore Present Value)
Data for Henry Company and Mayer Services are given in the following table. Henry Company is considering merging
with Mayer by swapping 1.25 shares of stock for each of Mayer Stock. Henry Company expects its stock to sell
at the same price/earnings multiple after the merger as before merging.

Items
Earninngs Available for common stock
Number of Shares of common stock outstanding
Market Price Per Share

A. Calculate the ratio of exchange in market price

B. Calculate the earnings per share and price/earnings ratio for each company

C. Calculate the price/earnings ratio used to purchase Mayer Services

D. Calculate the postmerger earnings per share for Henry Company.

E. Calculate the expected market price per share of the merged firm. Discuss this result in light of your
findings in part A.

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