For ACE Inc. is considering acquiring Lambert Corp After some negctiating Lamber

Question

For ACE Inc. is considering acquiring Lambert Corp After some negctiating Lambert has asked for a price of $400m in an all-cash deal Lambert Corp reported EBIT of $60million for the last year Depreciation expense totaled $20m, capital expenditures were $5m, both are expected to continue at the same amount for the next 3 years. NWC was S25m last year and is expected to grow at 10% per year for the foreseeable future. EBIT is expected to grow at 10% per year for the next 3 years and then level off at 3.5% growth forever beginning in year 4 The tax rate is 40%, ACE calculates that the WACC appropriate for Lamber is 12, what is the current value of Lambert? Should ACE agree to this transaction?

Explanation / Answer

49.27 * (1.035) / (0.12-0.035) = 599.93

Since NPV is positive, ACE Inc. can acquire Lambert Corp.

Note on NWC growth Year 0 Year 1 Year 2 Year 3 Year 4 NWC         25.00         27.50         30.25         33.28         36.60 Increase in NWC           2.50           2.75           3.03           3.33

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