Gekko Properties is considering purchasing Teldar Properties. Gekko\'s analysts

Question

Gekko Properties is considering purchasing Teldar Properties. Gekko's analysts project that the merger will result in incremental after-tax cash flows of $2 million, $4 million, $5 million, and $10 million over the next four years. The horizon value of the firm's operations, as of Year 4, is expected to be $107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. Teldar's post-merger beta is estimated to be 2.0, and its post-merger tax rate would be 35%. The risk-free rate is 6%, and the market risk premium is 5.5%. What is the value of Teldar to Gekko Properties? a. $70,190,364 b. $77,384,877 c. $81,254,121 d. $73,699,883 e. $66,680,846 Gekko Properties is considering purchasing Teldar Properties. Gekko's analysts project that the merger will result in incremental after-tax cash flows of $2 million, $4 million, $5 million, and $10 million over the next four years. The horizon value of the firm's operations, as of Year 4, is expected to be $107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. Teldar's post-merger beta is estimated to be 2.0, and its post-merger tax rate would be 35%. The risk-free rate is 6%, and the market risk premium is 5.5%. What is the value of Teldar to Gekko Properties? a. $70,190,364 b. $77,384,877 c. $81,254,121 d. $73,699,883 e. $66,680,846

Explanation / Answer

Start: 100 mil 100 mil * (1-.35) = 100 mil * .65 = 65 mil 6.5 mil *1.06 = 68 mil e.$68,157,980

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