BCO315 Corporate Finance Group B – Fall 2020 – Final Assignment – by Miguel Corte-Real
Task: Final Assignment (50% of course grade)
You are asked to answer all the questions in the proposed four cases.
This task assesses the following learning outcomes:
• Discuss and analyze the benefits of leasing versus ownership of assets.
• Analyse the concepts underlying the firm’s cost of capital.
• Demonstrate a deep understanding of the theory and practices of mergers and acquisitions
• Critically evaluate financial distress.
LAUNCH: WEEK 7 / DELIVERY: WEEK 13 Sunday, January 17th, 2021, 23:59hrs ON MOODLE Submission file format: Word document with all the answers, clearly identifying each case separately.
CASE 3 (25 points)
ABC Corporation is analyzing the possible acquisition of XYZ Company. There are two alternatives for ABC: 1) to use cash or 2) stock as payment. Both firms have no debt. ABC believes the acquisition will increase its total after-tax annual cash flow by €1.3 million indefinitely. The current market value of XYZ is €27 million, and that of ABC is €62 million. The appropriate discount rate for the incremental cash flows is 11%. ABC is trying to decide whether it should offer 35% of its stock or €37 million in cash to XYZ’s shareholders.
a. What is the cost of each alternative? (5 points)
b. What is the NPV of each alternative? (5 points)
c. Which alternative should ABC choose? (5 points)
d. What are some important factors in deciding whether to use stock or cash in an acquisition? (5 points)
e. Explain what defensive tactics the managers of XYZ Company could use to resist acquisition. (5 points) For more information on Corporate Finance check on this: https://en.wikipedia.org/wiki/Corporate_finance
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