The current value of Pursuit Co is $140,000,000, of which the market value of equity and debt are $70,000,000 each. The value of the combined company before paying Fodder Co shareholders is approximately $189,169,000, and if the capital structure is maintained, the market values of debt and equity will be approximately $94,584,500 each. This is an increase of approximately $24,584,500 in the debt capacity.
The amount payable for Fodder Co’s debt obligations and to the shareholders including the premium is approximately $49,116,500 [4,009 + 36,086 x 1·25]. If $24,584,500 is paid using the extra debt capacity and $20,000,000 using cash reserves, an additional amount of approximately $4,532,000 will need to be raised. Hence, if only debt finance and cash reserves are used, the capital structure cannot be maintained. |
