Washington Company is considering an acquisition of Orators Telecom Inc. Washing
ID: 2619826 • Letter: W
Question
Washington Company is considering an acquisition of Orators Telecom Inc. Washington Company estimates that acquiring Orators will result in incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company Data Collected (in millions of dollars) Year 1 10.0 4.0 33.0 105.1 Year 3 15.0 4.8 42.0 109.1 Year 2 EBIT Interest expense Debt Total net operating capital 12.0 39.0 107.1 Orators is a publicly traded company, and its market-determined pre-merger beta is 1.40. You also have the following information about the company and the projected statements. .Orators currently has a $10.00 million market value of equity and $6.50 million in debt. · The risk-free rate is 6% with a 8.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity rsL of 17.34% Orators's cost of debt is 8.00% at a tax rate of 40% The projections assume that the company will have a post-horizon growth rate of 5.00% . Current total net operating capital is $102.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $30 million . The firm has no nonoperating assets, such as marketable securities. With the given information, use the free cash flow to equity (FCFE) approach to calculate the following values involved in the merger analysis Value FCFE horizon value Value of FCFEExplanation / Answer
Since, acquiring Orator will have an incremental EBIT, so it evident upfront that Orator will create more wealth for Washinton.So it is a 3.more ,4 increase.
The next answer is True.FCFE is only applied when capital structure is constant.
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