Stubborn Motors,Inc

question 9

Multiple Choice

Stubborn Motors,Inc.,is asking a price of $10.5 million to be purchased by Rubber Tire Motor Corp.Rubber Tire currently has total cash flows of $6 million which are growing at 1 percent annually.Managers estimate that because of synergies the merged firm's cash flows will increase by an additional 4 percent for the first four years following the merger.After the first four years,incremental cash flows will grow at a rate of 3 percent annually.The WACC for the merged firms is 9.75 percent.Calculate the NPV of the merger.Should Rubber Tire Motor Corporation agree to acquire Stubborn Motors for the asking price of $10.5 million?

• A)Agree to the merger because the NPV = -$2.32 million.
• B)Agree to the merger because the NPV = $1.03 million.
• C)Disagree to the merger because the NPV = -$0.96 million.
• D)Agree to the merger because the NPV = $2.48 million.