Prince Sultan University Merger and Corporate Control & Derivatives Excel Worksheet answering the cases attached below please, it is regarding financial an

Prince Sultan University Merger and Corporate Control & Derivatives Excel Worksheet answering the cases attached below please, it is regarding financial analysis. Case 1. Merger and corporate control Case 2. Derivatives Case 1. Merger and corporate control
Bahar corporation is interested in acquiring Samma corporation. Samma has 1 million shares
outstanding and a target capital structure consisting of 30% debt. Samma’s debt interest rate is
8%. Asssume that the risk-free rate of interest is 5 % and the market risk premium is 6%. Both
Bahar and Samma face a 40% tax rate.
1. Samma free cash flow (FCF) is $ 2 million per year and its expected to grow at a constant
rate of 5% a year; its beta is 1.4. What is the value of Samma’s operations? If Samma has
$10.82 million in debt, what is the current value of Samma’s shares? (3 mark)
2. Bahar estimates that if it acquires Samma, interest payments will be $1.5 million per year
for three years, after which the current target capital structure of 30% debt will be
maintained. Interest in the fourth year will be $1.472 million, after which interest and tax
shield will grow at 5%. Synergies will cause the free cash flows to be $2.5 million, $2.9
million, $ 3.4 million, and $3.57 million in years 1 -4, respectively, after which the free
cash flows will grow at 5% rate. What is the unleveraged value of Samma, and what is the
value of its tax shields? What is the per share value of Samma to Bahar corporation?
Assume that Samma now has $10.82 million in debt. (5 mark)
3. Assuming the same information as for question (b), suppose that Bahar will increase
Samma’s level of debt at the end of year 3 to $30.6 million so that the target capital
structure is now 45% debt. Assume that with this higher level of debt the interest rate
would be 8.5%, and assume that interest payments in year 4 are based on the new debt
level from the end of year 3 and a new interest rate. Again, free cash flows and tax
shields are projected to grow at 5% after year 4. What are the values of the unlevered
firm and the tax shield, and what is the maximum price that Bahar would bid for Samma
now? (5 mark)
Case 2. Derivatives
a. A stock is worth SAR60 today. In a year the stock price can rise or fall by 15 percent. If the interest
rate is 6 percent. What is the price of a call option that expires in two years and has an exercise price of
SAR55? (Use the binomial model to calculate the price of a call option). (2.5 marks)
b. Use the Black-Scholes model to find the price for a call option with the following inputs: (1.5 mark)
• Current share price is $30
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Strike price is $35
Time to expiration is four months
Annualized risk-free rate is 5%
Variance of share return is 0.25

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