Robert , the CEO of Zygot Corporation believes that the company is undervalued and is subject to a takeover by Rystop Cable Company. He has requested the CFO to determine the value of the firm to appropriately advise the Board. The relevant information to be used in the calculations are as follows:
Year
1
$5
2.
$10
n
$7
4
$9
Pre-tax cash flows (millions)
Current beta
1.2
Post merger beta
1.5
Number of outstanding shares (millions). 10
Tax rate
Risk-free rate
20%
Market risk premium
7%
Terminal growth of cash flow
6%
for year 5 and beyond
6%
Zygot is debt free and has no preferred stock outstanding. Rystop makes a cash offer of $6.50* per share for the company.
a. Calculate the net (after tax) cash flow for each year excluding the terminal value.
b. What is the terminal value?
c. What is the value of Zygot using the discounted cash flow analysis?
d.Should Zygot shareholders accept Rystop offer? Explain
e.If management is hostile to the takeover, what advice would you give to Rystop?
