The Managers of BSW Inc

question 15

Multiple Choice

The managers of BSW Inc. have been approached by EAG Corp. for a possible merger. EAG Corp. is asking a price of $50 million to be purchased by BSW Inc. The two firms currently have cumulative total cash flows of $2.5 million that are growing at 2 percent annually. Managers of EAG estimate that because of synergies the merged firm's cash flows will increase to 5 percent for the first three years following the merger. After the first three years, managers of EAG have estimated that cash flows will grow at a rate of 2 percent. The WACC for the merged firms is 12 percent. Managers of BSW Inc. agree that cash flows should grow at an additional 5 percent for the first three years, but are unsure of the long-term growth rate in cash flows estimated by EAG. Calculate the minimum growth rate needed after the first three years such that BSW Inc. would see this merger as a positive NPV project.

• A) 5.00 percent
• B) 6.925 percent
• C) 1.728 percent
• D) 12.00 percent

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Definitions:

Depression

A mood disorder characterized by persistent feelings of sadness, hopelessness, and a lack of interest or pleasure in life.

Learned Helplessness

A state where an individual experiences feelings of being powerless, resulting from a traumatic experience or ongoing inability to achieve success.

Seligman

A psychologist known for his work on learned helplessness and positive psychology.

Wolpe

Joseph Wolpe, a South African psychiatrist known for developing systematic desensitization, a method used in behavioral therapy to overcome phobias and anxiety.