Consider the following scenario: Three Waters Co. is considering an acquisition of Zebra Engineering Corp. (ZEC), and estimates that acquiring ZEC will r. esult in incremental after-tax net cash flows in years 1–3 of $14.00 million, $21.00 million, and $25.20 million, respectively.
After the first three years, the incremental cash flows contributed by the ZEC acquisition are expected to grow at a constant rate of 6% per year. Three Waters’s current beta is 1.60, but its post-merger beta is expected to be 2.08. The risk-free rate is 5%, and the market risk premium is 7.10%.
Based on this information, complete the following table by selecting the appropriate values (Note: Do not round intermediate calculations, but round your answers to two decimal places):
Value
Post-merger cost of equity
Projected value of the cash flows at the end of three years
The value of Zebra Engineering Corp. (ZEC)’s contribution to Three Waters Co.
Zebra Engineering Corp. (ZEC) has 6 million shares of common stock outstanding.
What is the largest tender offer Three Waters Co. should make on each of Zebra Engineering Corp. (ZEC)’s shares?
a. $30.78
b. $25.65
c. $20.52
d. $30.79