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You have been given the job of evaluating the following merger candidate. You have collected the following cash flow for the acquisition candidate...
1. You have been given the job of evaluating the following merger candidate. You have collected the following cash flow for the acquisition candidate for the proposed merger (in millions):
Year 1 2 3 4 5__
Cash flows now 80 85 105 145 180
Additional cash flows with merger 40 90 100 125 150
Total cash flows with merger 120 175 205 270 330
Risk free rate of return 3.5%
Beta for this project (the company after merging) 1.5
Market risk premium 5.5%
Pre-tax cost of debt 6.6%
Marginal tax rate 22%
Number of shares outstanding for the target company (millions) 55
Current market price per share for the target company $38
Percentage of the acquisition financed with debt 50%
Percentage of the acquisition financed with common equity 50%
What is the after tax cost of debt?
What is the after tax cost of common equity
What is the weighted average cost of capital for this acquisition candidate?
What is the maximum price per share you are willing to pay for this candidate?
Based on the numbers above, would you pursue this candidate?
