F Corporation is considering the acquisition of T Corporation. Without the merge

Question

F Corporation is considering the acquisition of T Corporation. Without the merger, T Corporations cash flow to capital is expected to be $3 million next year and is expected to grow at a constant 4 percent a year thereafter. With a merger, T Corporations constant growth rate will be increased to 6 percent. The tax rate is 30 percent and the after-tax required return is 12 percent. Assume year-end cash flows.

a.             What is the value of Ts capital if T is not acquired by F Corporation?

b.            What is the value of Ts capital if T is acquired by F Corporation?

Explanation / Answer

a.             What is the value of T

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