Company a is considering a merger with company b

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Reference no: EM131339706

Company A is considering a merger with company B. B is publicly traded company and its current beta is 1.25. B has been barely profitable, so it has paid an average of only 15% taxes during the last several years. In addition, it uses little debt, having a debt ratio of just 27%. If the acquisition were made, A will operate B as separate, wholly owned subsidiary. A would pay taxes on a consolidated basis, and the tax rate would therefore increase to 40%. A also would increase the debt capitalization in the B subsidiary to 36% of assets, which would increase its beta to 1.52. A’s acquisition department estimates that B, if acquired, would produce the following cash flows to A’s shareholders (in millions of dollars): Year Cash Flows 1 $1.41 2 1.63 3 1.88 4 2.15 5 and beyond Constant growth at 5% These cash flows include all acquisition effects. A’s cost of equity is 13%, its beta is 1 and its cost of debt is 9%. The risk free is 4%. What is the dollar value of B to A? 13.93 million 15.64 million 11.24 million 9.52 million None of the given answers is correct.

Reference no: EM131339706

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