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Financy Policy - Assignment Example

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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. ...
The strategic planning manager is entitled to reduce the acquisition amount so that the firm Alresford could take over Gibson at more profit and at a price less than the market price. The firm Alresford aims to take over Gibson ltd at a reduced price, which is less than the market value of the firm in order to obtain profits. c) Determine which of the strategic planning manager’s suggestions should be undertaken and specify the optimum life of the south division. Advise Alresford ltd. of the maximum amount it should now be prepared to pay for Gibson. The strategic planning manager’s suggestion of using the Alresford’s transport rather than the north division’s transport which could save the transport expenses by $ 600,000 annually results in a savings of $ 2,400,000 in four years. Even though such a change would increase the replacement cost by $ 1.6 million, yet such a type of system will result in a savings of $ 800,000 which the firm can use for other business restructuring processes. When the strategic planning manager’s suggestions are undertaken, then the maximum amount that Alresford ltd should pay for Gibson is calculated as below: North: Operating net cash flows – transport department’s expense for four years – advertising expense for three years North – 46,000,000 – 2,400,000 – 3,600,000 – 4,800,000 = 35,200,000 South: Operating net cash flows – increase in annual cash flows until termination South – 20,000,000 - 4,000,000 - 3,000,000 = 13,000,000 North + south = 48,200,000 The maximum amount that Alresford should be prepared to pay for Gibson if the strategic planning manager’s suggestions are completely undertaken is $ 48,200,000. d) What difference would it make to calculations if we assumed that Alresford ltd ...Show more


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…
Author : ldubuque
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