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Mergers & Acquisition: Projected Cash Flows

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The following table shows the projected cash flows and their respective discount rates after the acquisition of Small Fry Co. by Whale Co. Fill in the blanks and calculate the stock price of the new firm if it has $100 million of debt and 5 million shares of stock outstanding. . Recall that the present value (PV) of a cash flow in perpetuity equals the (cash flow/ i), where i equals the discount rate.

"Net Cash Flow per
Year (Perpetual)
(in $ millions)" Discount Rate (%) "Value
(in $ millions) "
Small Fry Co. $8 16% ?
Whale Co. 20 10 ?
Benefits from acquisition 5 ? 42.5
Revenue enhancement 2.5 ? 12.5
Cost reduction 2 10 ?
Tax shelters 0.5 5 ?
Whale Co. 33 ? ?

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Question deals with projected cash flows and their respective discount rates after the acquisition of Small Fry Co. by Whale Co. . The solution provides missing numbers in the table and calculates the stock price of the new firm.

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"Net Cash Flow per
Year (Perpetual)
(in $ millions)" Discount Rate (%) "Value
(in $ millions) "
Small Fry Co. $8 16% $50
=8/16.%
Whale Co. 20 10% $200 ...

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