N Corporation is considering the acquisition of A Corporation. A Corporation has

Question

N Corporation is considering the acquisition of A Corporation. A Corporation has earnings before interest and tax of $1.75 million, and asset replacement cost approximately equals depreciation. Efficiencies gained through the merger will reduce As operating costs by $320,000. Cash flows occur at year-end.

A. Assuming a 20 percent tax rate and a 10 percent required return, what is the value of As capital without a merger?

B. Assuming a 20 percent tax rate and a 10 percent required return, what is the value of As capital after a merger?

Explanation / Answer

a) {($1.75 mn) * (1- 20%)} / 10% = $14 millions

b) $14 millions + [{($0.32 mn) * (1-20%)} / 10%] =$16.56 millions

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