The Managers of State Bank Have Been Approached by City

question 33

Multiple Choice

The managers of State Bank have been approached by City Bank about a possible merger. State Bank is asking a price of $171.78 million to be purchased by City Bank. City Bank currently has total cash flows of $30 million that are growing at 2 percent annually. Managers of State Bank estimate that because of synergies the merged firm's cash flows will increase by 6 percent for the first four years following the merger. After the first four years, managers of State Bank have estimated that incremental cash flows will grow at a rate of 3 percent. The WACC for the merged firms is 11 percent. Managers of City Bank agree that cash flows should grow at an additional 6 percent for the first four years, but are unsure of the long-term growth rate in incremental cash flows estimated by City Bank. Calculate the minimum growth rate needed after the first four years such that City Bank would see this merger as a positive NPV project.

• A) 7.26 percent
• B) 7.73 percent
• C) 8.01 percent
• D) 8.29 percent

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Definitions:

Enantiomeric Excess

A measurement of the purity of an enantiomer in a mixture, defined as the difference in percentage between the two enantiomers.

Diastereomers

Stereoisomers which aren't each other's mirror reflections and possess distinct physical characteristics.

Geometric Isomers

Molecules with the same molecular formula and sequence of bonded atoms (constitution), but differing in the three-dimensional orientations of their atoms in space.

(E)-2-pentene

An alkene with the formula CH3CH=CHCH2CH3 where the two substituents on the double bond are on opposite sides, denoted by the (E) configuration.