Work Question 1) Why WACC cannot be used as a discount for calculating the value of a merger and acquisition for the first few years of the analysis?…

The cost of debt is 5%

The cost of equity is 20%

The tax rate is 40%

The company has 15 million shares outstanding

The current stock price is $2.05

The company is currently holding no financial assets.

The company has $3,000,000 in debt.

WACC, the cost of capital, is equal to 11.5%

RSU, the cost of unlevered equity, is equal to 12.5%

Question 5)

Calculate the value of the debt tax shield.

Question 6)

Calculate the horizon value of the target.

Question 7)

Calculate the value of operations.

Question 8)

What is the highest offer price we can make? Is the acquisition feasible?

Question 9)

Why do the target’s free cash flows vary from one acquirer to another?

Question 10)

What are the main disadvantages of the payback method for evaluating projects?

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