Asked by
Liberia Cristiana Leon De Juda
on Nov 28, 2024
Verified
Dunbar Hardware,a national hardware chain,is considering purchasing a smaller chain,Eastern Hardware.Dunbar's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million,and they have determined that the appropriate discount rate for valuing Eastern is 16%.Eastern has 4 million shares outstanding and no debt.Eastern's current price is $16.25.What is the maximum price per share that Dunbar should offer?
A) $16.25
B) $16.97
C) $17.42
D) $18.13
Interest Tax Savings
The reduction in tax payments resulting from the deduction of interest payments on debt from taxable income.
Discount Rate
In DCF analysis, the rate used to calculate the present worth of future cash flows.
- Ascertain the worth of a firm through the calculation of the present value of its free cash flows and recognize the influence of leverage on the value of the firm.
- Calculate the suitable discount rate for evaluating free cash flows and interest tax shields in mergers and acquisitions scenarios.
Verified Answer
BL
Learning Objectives
- Ascertain the worth of a firm through the calculation of the present value of its free cash flows and recognize the influence of leverage on the value of the firm.
- Calculate the suitable discount rate for evaluating free cash flows and interest tax shields in mergers and acquisitions scenarios.