Reference no: EM131933765

Lee Enterprises and Jackson Distributors are considering a merger. Projections for the coming year for the companies operating independently are as follows:

Lee Enterprises:

EBIT = $200,000

Change in Working Capital = $20,000

Capital Spending = $30,000

Depreciation Expense = $20,000

Jackson Distributors:

EBIT = $450,000

Change in Working Capital = $45,000

Capital Spending = $75,000

Depreciation Expense = $50,000

Before the merger, the firms have the same cost of capital of 14% and the same expected perpetual growth rate of 4%. After the merger, the combined firms are expected to have a cost of capital of 13% and a perpetual growth rate of 5%. The tax rate for both firms is 40%.

1. What is the premerger value of the combined firms?

A. $1,800,000

B. $2,900,000

C. $3,400,000

D. None of the above

2. Ancient Alloys Corp. is interested in acquiring Advanced Technologies, Inc., in the expectation that the acquisition would provide the combined firms with $4 million in tax-shield benefits. If this amount can be used to offset income by $1 million each year for the next four years, what is the present value of the expected tax-shield benefit? The cost of capital is 14%.

A. $877,193

B. $2,913,712

C. $3,508,772

D. $4,203,686