Two companies are contemplating a merger. In the new entity is expected to require an initial investment of $20 million which will then result in expense savings of $2.7 million for 15 years. The weighted average cost of capital is 8%. The firm just issued bonds at 6.5%. The company would expect the following financial results from the new company:
A. IRR=10.5%, NPV=$5.4 MILLION
B. IRR=10.5%, NPV=$3.1 MILLION
C. IRR=8.0%, NPV=$20.5 MILLION
D. Not enough information to tell
Answer:B
Two companies are contemplating a merger. In the new entity is expected to require an initial investment of $20 million which will then result in expense savings of $2.7 million for 15 years. The weighted average cost of capital is 8%. The firm just issued bonds at 6.5%. The company would expect the following financial results from the new company:
A. IRR=10.5%, NPV=$5.4 MILLION B. IRR=10.5%, NPV=$3.1 MILLION C. IRR=8.0%, NPV=$20.5 MILLION D. Not enough information to tell