Possible net present values and associated probabilities for a new investment ar
ID: 2632025 • Letter: P
Question
Possible net present values and associated probabilities for a new investment are as follows:
NPV -1020 -820 80 450 550 800
Probability .15 .30 .20 .10 .10 .15
What is the expected value______________, median,______________ and mode _________________?
TNT Corporation is considering the acquisition of BRM Corporation. TNT has 220,000 shares of stock, with earnings per share of $2.50 and a market price per share of $30. BRM has 265,000 shares outstanding with earnings per share of $1.40 and a market price of $10. The merger is expected to increase net income of the combined companies by $275,000 (in synergistic benefits). What is the maximum exchange ratio TNT can offer and what is the minimum exchange ratio BRM could accept?
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) 1.6
Market risk premium 5%
Pre-tax cost of debt 7.5%
Marginal tax rate 30%
Number of shares outstanding for the target company (millions) 55
Current market price per share for the target company $60
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?
Explanation / Answer
NPV Probability Expected Value -1020 * 0.15 = -153 -800 * 0.3 = -240 80 * 0.2 = 16 450 * 0.1 = 45 550 * 0.1 = 55 800 * 0.15 = 120 Expected Value (Sum of Exp. Val) = -157 Median = Median (NPV) 265 Mode 80