T Corporation is considering the acquisition of M Corporation. M Corporation gen
ID: 2624984 • Letter: T
Question
T Corporation is considering the acquisition of M Corporation. M Corporation generates earnings before interest and tax of $1.75 million a year, and asset replacement cost approximately equals depreciation. Alternative minimum tax is not an issue, there are no synergistic benefits, and cash flows are expected to continue forever and are not expected to grow in the future. Assuming a 20 percent tax rate and a 9 percent after-tax required return, what is net cash flow? Assuming year-end cash flows, what is the value of M Corporation
Explanation / Answer
T Corporation is considering the acquisition of M Corporation. M Corporation generates earnings before interest and tax of $1.75 million a year, and asset replacement cost approximately equals depreciation. Alternative minimum tax is not an issue, there are no synergistic benefits, and cash flows are expected to continue forever and are not expected to grow in the future.
Assuming a 20 percent tax rate and a 9 percent after-tax required return, what is net cash flow?
Answer:
EBIT = $ 1,750,000
Tax Expenses = 20%* 1750000 = 350000
EBT = 1750000 - 350000 = 1400000
Since, asset replacement cost approximately equals depreciation
Net Cash flow remain same as EBT i.e $ 1,400,000
Net Cash flow = $ 1,400,000
Assuming year-end cash flows, what is the value of M Corporation
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