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

Explanation / Answer

a.

b.

Schedule of Value of Capital of A Corporation without Merger Particulars              Amount ($) Earning Before Interest and Tax A                17,50,000 Tax @ 20% B                  3,50,000 Earning After Tax C=A-B                14,00,000 Required return D                         10% Value of Firm C/D              1,40,00,000

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