August Holdings Ltd and Sunday Ltd are considering a merger. Sunday Ltd is a lis
ID: 2329020 • Letter: A
Question
August Holdings Ltd and Sunday Ltd are considering a merger. Sunday Ltd is a listed company with total assets amounting to N$135 million. Its debt ratio is 25% and cost 9%. August Ltd has estimated that the free cash flow will be as follows: Year FCF $m 1 13 2 15 3 17.5 4 20 From year 5 and beyond free cash flows will grow at 6 percent indefinitely. These cash flows include all acquisition effects. The cost of equity for August Ltd is 14% since it has higher debt. Required: (a) What discount rate should be used to discount the estimated cash flows? 4 marks (b) What is the dollar value of Sunday Ltd? 6 marks (c) How much is August Ltd prepared to pay for Sunday Ltd? 6 marks (d) Explain the meaning of the following terms: (i) Synergy (ii) Divestiture (iii) Leveraged buyout
Explanation / Answer
Answer :-
Given data ,
Total assets = $135
Debt ratio = 25%
equity ratio = 100 - 25
= 75%
Debt cost = 9%
Cost of equity rate = 14%
Growth rate = 6%
(a) .Discount rate:-
Discount rate = debt cost * debt ratio + cost of equity * equity ratio
= 9% * 25% + 14% * 75%
=12.75%
b). sorry however I don't know about that inquiry what is asking .so would prefer not to give wrong answer .
(d).
(i). Synergy :-
In a straightforward term ,if 2 finish are meeting up in type of merger and so forth .and if the joined estimation of these 2 organizations is more noteworthy than the individual aggregate, at that point we will spare there is cooperative energy ,in the merger .
(ii).Divestiture :-
(iii).Leveraged buyout:-
Note:- As per the chegg rule i have to complete the answer in time limit .so ,iam answered for only three questions . It will take more time that's why ioam not answered to that question .if need remaining question also please upload it as a another question .
THANK YOU.
Discount rate = 12.75%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.