8. BB Corp is evaluating the acquisition of KT Company. BB analyst projects the following...
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8. BB Corp is evaluating the acquisition of KT Company. BB analyst projects the following post merger cash flows for KT Company if purchased by BB Corp. Year 1 Year 2 Net Sales $1600 $1700 Oper Expenses 800 850 Interest 20 25 Depreciation 10 10 Net Investment 10 10 In Operating Capital The current market beta for KT Company is 1.1 and its tax rate is 25% and debt ratio of 30%. BB Corp has a tax rate of 25%. Assume a market return of 9% and a risk free rate of 4%. a. What is the appropriate discount rate to use in calculating the value of the acquisition? (Use the Adjusted Present Value Approach). b. What are the free cash flows for the two years and tax shield for two years? c. If we assume constant growth of 5% from beyond Year 2, calculate the horizon value of free cash flows and the horizon value of tax shield flows. d. Find the value of the operations of the target. Assume no non-operating assets. e. If the market value of debt is $4000 and there is no preferred stock, find the maximum price per share that should be offered for the target. Assume there 200 shares of stock.
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