Solution-Determine whether the proposed cash acquisition

Determine whether the proposed cash acquisition justified

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Reference no: EM133130559

Question - Luxe Foods is contemplating acquisition of Valley Canning Company for a cash price of $180,000. Luxe currently has high financial leverage and therefore has a cost of capital of 14%. As a result of acquiring Valley Canning, which is financed entirely with equity, the firm expects its financial leverage to be reduced and its cost of capital to drop to 11%. The acquisition of Valley Canning is expected to increase Luxe's cash inflows by $20,000 per year for the first 3 years and by $30,000 per year for the next following 12 years.

Required -

1. Determine whether the proposed cash acquisition is financially justified. Explain your answer.

2. If the firm's financial leverage would actually remain unchanged as a result of the proposed acquisition, would this alter your recommendation in part (a) above? Support your answer with numerical data.

Reference no: EM133130559

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Determine whether the proposed cash acquisition justified

Reference no: EM133130559

Reference no: EM133130559

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