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Yam Ltd (Y) has been evaluating the acquisition of Xavier Ltd (X). The annual expected cash flows of Y and X are, respectively, $1.16 million per annum in perpetuity and $640 000 per annum in perpetuity. These cash flows are expected to be unaffected by the takeover. The systematic risk (beta) of Y is 0.75 and of X is 1.0. The risk-free interest rate is 10 per cent and the expected excess return on the market portfolio is 6 per cent. Calculate the price at which X represents a zero net present value investment.
(a) Is it likely that Y's shareholders will benefit from the takeover?
(b) Assume the information above exceptthat X is expected to increase its annual cash flows by $150,000 per annum. If Y were to pay a control premium of $1m, would this deal be of benefit to Y shareholders?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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