Fert food has a current market value of $30 million and earns $2,700, 000 annual

Question

Fert food has a current market value of $30 million and earns $2,700, 000 annually, while Tools-4U has a market value of $5 million and annual earnings of $1 million per year. If the companies merge an additional cash flow of $183611 would result next year, which is expected to grow at 1.5% per annum. The merged firm's weighted average cost of capital will be 9.5 percent and will have 11 million shares. If Fert food pays $5,500, 000 in cash for Tools-4U, what would be the net present value of the merger? (Please do not use $ or, when inputting your answer). Answer:___________

Explanation / Answer

NPV of the Merger= Value of the Target firm+Value of additional cash flows-Price paid (5000000)+(183611/(0.095-0.015))-5500000 Answer: 1795138

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