Finnancial cpa Question

Marston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its beta is 1.30. Conroy has been barely profitable, so it has paid an average of only 20% in taxes during the last several years. In addition, it uses little debt; its target ratio is just 25%, with the cost of debt 9%. If the acquisition were made, Marston would operate Conroy as a separate, wholly owned subsidiary. Marston would pay taxes on a consolidated basis, and the tax rate would therefore increase to 35%. Marston also would increase the debt capitalization in the Conroy subsidiary to wd = 40%, for a total of $22.27 million in debt by the end of Year 4, and pay 9.5% on the debt. Marston’s acquisition department estimates that Conroy, if acquired, would generate the following free cash flows and interest expenses (in millions of dollars) in Years 1-5:

In Year 5, Conroy’s interest expense would be based on its beginning-of-year (that is, the cnd-of-Ycar-4) debt, and in subsequent years both interest expense and free cash flows are projected to grow at a rate of 6%.
These cash flows include all acquisition effects. .1arson’s cost of equity is 10.5%, its beta is 1.0, and its cost of debt is 9.5%. The risk-free rite is 6%, and the market risk premium is 4.5%.
a. What is the value of Conroy’s unlevered operations, and what is the value of Conroy’s tax shields under the proposed merger and financing arrangements?
b. What is the dollar value of Conroy’s operations? If Conroy has $10 million in debt outstanding, how much would Marston be willing to pay for Conroy?

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Sheet3Sheet2 Build a ModelAssetsTotal assetsLiabilities and equityRetained EarningsCurrent assetsNet fixed assetsTotal claimsAccounts payableAccrued taxesAccrued wagesNotes payable Total current liabilitiesDebenturesCommon stockFirst-mortgage bondsaSecond-mortgage bondsaSubordinated debenturesba All fixed assets are pledged as collateral to the mortgage bonds.b Subordinated to notes payable only.Trustee\'s costs =Proceeds from sale of current assets =Proceeds from sale of fixed assets =Other inputs (in thousands of dollars):Government taxes due Trustee\'s expenses Worker\'s wages dueTotalRemaining proceeds from sale of fixed assets after satisfying first mortgage holdersRemaining proceeds from sale of fixed assets after satisfying first and second mortgage holdersPriority claims:Funds available for distribution to general creditors:Unsatisfied first mortgageUnsatisfied second mortgageAmount of ClaimPro Rata DistributionPro rata distribution percentageDistribution after Subordination AdjustmentSubordinated debenturesTotal claims (including trustee expenses)Total of satisfied priority claimsTotal unsastified claims from all claimantsInitital Distribution to Priority ClaimantsTotal DistributionFirst mortgageSecond mortgagePercent of Claim SatisfiedOriginal ClaimDistribution to first mortgage (paid from sale of fixed assets)Distribution to second mortgage (paid from sale of fixed assets after satisfying first mortgage holders)Remaining Unsatisfied ClaimSubordination AdjustmentTotal distributions (including prior distributions to mortgage holders and subordination adjustment):Distributions due to general claims:Total preliminary distributions to priority claimaintsBalance Sheets (Millions of Dollars)Duchon Industries had the following balance sheet at the time it defaulted on its interest payments and filed for liquidation under Chapter 7. Sale of the fixed...

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Problem-26.5.xls