Valuation of a Merger You Own Stock in Carpet City,Inc

question 84

Multiple Choice

Valuation of a Merger You own stock in Carpet City,Inc.,which has just made a bid of $165 million to purchase Tile Corporation.The two firms currently have cumulative total cash flows of $25 million which are growing at 2 percent annually.Managers estimate that because of synergies the merged firm's cash flows will increase by an additional 4 percent for the first three years following the merger.After the first three years cash flows will grow at a rate of 3 percent.The merged firms are expected to have a beta = 1.75,the risk-free rate is 5.5 percent,and the market risk premium is currently 7.5 percent.Calculate the NPV of the merger.Will you vote in favor of the merger?

• A)Option A
• B)Option B
• C)Option C
• D)Option D

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