Finance & Accounting
Pages 6 (1506 words)
Finance Policy Name of Author Author’s Affiliation Author Note Author note with more information about affiliation, research grants, conflict of interest and how to contact Finance Policy Part A 1 (a). Estimate market value of Gibson ltd in the absence of any take over possibilities.
The market value of a firm is dependent upon the capital structure of the company. The firm Gibson ltd is equity financed, therefore, the beta of assets as well as of equity is the same. The total operating cash flows for the period of four years in the division are as follows: North - $60,000,000 South - $32,000,000 The taxable operating profits for the period of 4 years in the divisions are as follows: North - $60,000,000 South - $32,000,000 The planned capital expenditure of $ 8 million and its tax consequences has not been incorporated in the north division. The corporate tax rate is 30%. 8,000,000*30% = 2,400,000 8,000,000-2,400,000 =5,600,000 Therefore the taxable operating profit in the north division is $60,000,000 - $5,600,000 = 54,400,000. The salvage value for North division - $ 24 million South division - $ 12 million Therefore the operating net cash flows North = 46,000,000 South = 20,000,000 The total net cash flows of both the divisions together are : 66,000,000 Interest rate is 18%. The market value of the firm is 66,000,000 * 18% = 11,880,000 The market value of the firm is 66,000,000-11,880,000 =54,120,000 (b) Advise Alresford ltd. on the maximum amount it should be prepared to pay for Gibson if the strategic planning manager’s suggestions are completely ignored. ...