Safeco Company and Risco Inc. are identical in size and capital structure. However, the riskiness of their assets and cash flows are somewhat different, resulting in Safeco having a WACC of 12% and Risco a 14% WACC. Safeco is considering Project X, which has an IRR of 12.5% and is of the same risk as a typical Safeco project. Risco is considering Project Y, which has an IRR of 13.5% and is of the same risk as a typical Risco project.
Now assume that the two companies merge and form a new company, Safeco/Risco Inc. Moreover, the new company’s market risk is an average of the pre-merger companies’ market risks, and the merger has no impact on either the cash flows or the risks of Projects X and Y. Which of the following statements is correct?
◦
After the merger, Safeco/Risco would have a corporate WACC of 13%. Therefore, it should reject Project X but accept Project Y.
◦
If evaluated using the correct post-merger WACC, Project X would have a negative NPV.
◦
If the firm evaluates these projects and all other projects at the new overall corporate WACC, it will become riskier over time.
◦
Safeco/Risco’s WACC, as a result of the merger, would be 12%.
Lake structure.
Plant Cell Wall Structure
Structure of the ovary and uterine (fallopian) tube. Figure illustrates stages of ovum development a
Crystal structure of human topoisomerase I in complex with a 22-bp DNA duplex
When operating your own business, it is wise to know your cost of capital and that of the ...
The density of Pb(s) is 11.34 g/cm3. Pb(s) exists in the cubic-closest packed structure