Blazer Inc. is thinking of acquiring Laker Company. Blazer expects Laker’s NOPAT to be $9 million the first year, with no net new investment in operating capital and no interest expense. For the second year, Laker is expected to have NOPAT of $25 million and interest expense of $5 million. Also, in the second year only, Laker will need $10 million of net new investment in operating capital. Laker's marginal tax rate is 40%. After the second year, the free cash flows and the tax shields from Laker to Blazer will both grow at a constant rate of 4%. Blazer has determined that Laker’s cost of equity is 17.5%, and Laker currently has no debt outstanding. Assume that all cash flows occur at the end of the year, Blazer must pay $45 million to acquire Laker. What it the NPV of the proposed acquisition? Note that you must first calculate the value to Blazer of Laker’s equity.
Click here for the solution: Blazer Inc. is thinking of acquiring Laker Company
Showing posts with label acquiring. Show all posts
Showing posts with label acquiring. Show all posts
Friday, August 21, 2015
Friday, July 3, 2015
Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation
Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation, a young firm with a high growth rate of earnings. The acquisitions analysis group at DM has produced the following table of relevant data:
Dublin Medical Arlington
Earnings per share $3.00 $2.00
Dividend per share $3.00 $.80
Number of shares 200 million 10 million
Stock price $30 $20
DM's analysts estimate that investors currently expect growth of about 6% per year in Arlington's earnings and dividends. They assume that with the improvements in management that DM could bring to Arlington, its growth rate would be 10% per year beginning one year from now with no additional investment outlays beyond those already expected.
1. What is the expected gain from the acquisition?
2. What is the net present value (NPV) of the acquisition to DM shareholders if it costs an average $30 per share to acquire all of the outstanding shares?
3. Would it matter to DM's shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?
Click here for the solution: Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation
Dublin Medical Arlington
Earnings per share $3.00 $2.00
Dividend per share $3.00 $.80
Number of shares 200 million 10 million
Stock price $30 $20
DM's analysts estimate that investors currently expect growth of about 6% per year in Arlington's earnings and dividends. They assume that with the improvements in management that DM could bring to Arlington, its growth rate would be 10% per year beginning one year from now with no additional investment outlays beyond those already expected.
1. What is the expected gain from the acquisition?
2. What is the net present value (NPV) of the acquisition to DM shareholders if it costs an average $30 per share to acquire all of the outstanding shares?
3. Would it matter to DM's shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?
Click here for the solution: Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation
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