Find out the expected return on capital, Macroeconomics

Butthole Industries is buying out Avengers, Inc.  Butthole and Avengers both have market capitalizations equal to their fair value or the present value of their net cash flows.  Butthole generates $45M per year in net cash flows but has no growth.  Avengers is expected to generate $25M in net cash flows next year. Also, grow at 15% per year after.  The return on capital of both companies over the past years:

Return on Capital

Butthole

Avengers

Year 1

-20.5%

45.8%

Year 2

41.1%

-5.8%

Year 3

10.5%

20.9%

Note that the relevant discount rate for each firm is the "average" return on capital.

A.  If past history is a good indicator of future performance, what are the expected return on capital and standard deviation of return on capital for the merged entity?

B.  In which of the two major dimensions this merger could possibly help Butthole: boosting the return or reducing the risk?  Prove your point quantitatively.

 

Posted Date: 3/21/2013 2:11:54 AM | Location : United States







Related Discussions:- Find out the expected return on capital, Assignment Help, Ask Question on Find out the expected return on capital, Get Answer, Expert's Help, Find out the expected return on capital Discussions

Write discussion on Find out the expected return on capital
Your posts are moderated
Related Questions
Classify each good as a final good or intermediate good. (briefly explain wach choice) 1. running shoes 2. cotton fibers 3. watches 4. textbooks 5. coal 6. sunscr

The market demand for a factor   The market demand curve for any input is not simply the horizontal summation of the individual demand curves of all the firms. This is due to th

An ecologist is interested in the possible negative effects of marinas and boat mooring areas on the abundances of fish. Having read Hurlbert's paper about pseudoreplication, he de

what are the effects of interest rate in the economy of south africa in unemployment, economic groth, employment. and economic growth

A radiology firm charges $2,000 per exam. Uninsured patients are expected to pay list price. How much do they pay?

Why do some countries have a high real per capita income? High standard of living within the industrialized nations consider to be largely because of the high productivity of

effects of a real wage existing in the market that is lower than the equillibrium real wage. what will eventually happen in this labour market if it is perfectly competitive

Functions of a Commercial Bank 1. Credit Creation Creation of credit is a major function of a commercial bank. When a bank creates credit or advances loans, there tends

Explain the pre-emptive monetary policy Since 1992 UK monetary policy has been 'pre-emptive'. In pre-emptive monetary policy authorities announce that they are prepared to rai

Financial Development A well developed financial system is very essential for the smooth functioning of any economy. One set of important statistical indicators that is used to