Merger valuation and discounted cash flows
When a merger takes place between two companies to form a single firm, the target company (continues/does not continute) to operate as a seperate identity.
Consider the following scenario:
Ziffy Corp. is considering an acquisition of Tull Industries., and estimates that acquiring Tull will result in incremental after-tax net cash flows in years 1-3 of $16.0 million, $24.0 million, and $28.8 million, respectively.
After the first three years, the incremental cash flows contributed by the Tull acquisition are expected to grow at a constant rate of 4% per year. Ziffy's current beta is 1.20 , but its post-merger beta is expected to be 1.56. The risk-free rate is 5.5%, and the market risk premium is 7.60%.
Based on this information, complete the following calculations:
Post-merger cost of equity =
Projected value of the cash flows at the end of three years =
The value of Tull Industries' contribution to Ziffy Corp. =
Tull Industries has 5 million shares of common stock outstanding. What is the largest tender offer Zippy Corp. should make on each of Tull Industries' shares?