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.

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

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

Explanation / Answer

Details Amt$ As per given condition , asset replacement cost = depreciation. So , Free Cash flow = Net Income after Tax Before merger: A's EBIT =         1,750,000 Tax @ 20%             350,000 Post Tax Income =         1,400,000 Cost of Capital 10% So Value of A before merger =1400000/10%=       14,000,000 After merger: EBIT =1750000+320000=         2,070,000 Less Tax @20%=             414,000 Post Tax income=         1,656,000 Cost of Capital =10% Value of A after merger =1656000/10%=       16,560,000

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