Answered

Explore a diverse range of topics and get answers from knowledgeable individuals on IDNLearn.com. Find reliable solutions to your questions quickly and accurately with help from our dedicated community of experts.

Tango Company is planning to acquire Delta Company. The additional pre-tax income from the acquisition will be $300,000 in the first year, but it will increase by 2% in future years. Because of diversification, the beta of Tango will decrease from 1.2 to 0.8. Currently the return on the market is 9% and the riskless rate is 4%. What is the maximum price that Tango should pay for Delta

Sagot :

Ogorwyneidn

Complete question: Tax rate is 35%

Answer:

3250000

Explanation:

Tax income = 300000

Tax rate = 35%

Growth = 2%

Risk free rate = 4%

Expected market return= 9%

Beta = 0.8

We solve for the expected return on assets

= 4% + (9%-4%)x0.8

= 0.04+0.05*0.8

= 0.04 + 0.04

= 0.08

= 8% return on assets

The maximum price to pay

300000*(1-0.35)/(8%-2%)

= 300000 * 0.65/0.06

= 300000x10.8333333333

= 3,250,000

Thank you for participating in our discussion. We value every contribution. Keep sharing knowledge and helping others find the answers they need. Let's create a dynamic and informative learning environment together. IDNLearn.com is your reliable source for accurate answers. Thank you for visiting, and we hope to assist you again.