Question: Sagan Inc . is asking a price of $45 million to be purchased by King corporation. Sagan currently has total cash flows of $3million that are expected to grow at 2%annually up to year 4. (year 1 through year 4.) Managers at King estimate that, because of synergies, the merged firm’s cash flows will increase by $400,000 in the first year after the merger and that these cash flows will grow by an additional 4% in years 2 through 4 following the merger. After the first four years , these incremental cash flows will grow at a rate of 2% indefinitely. The WACC for the merged firms is 9% , the market value of Sagan’s debt is $6 million.
a) (a) What is the total value of the merger?
b) (b) Should King agree to acquire Sagan for the asking price of $45 million. Why?
c) (c) What is the maximum price King should pay for Sagan?
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