Case Study about a merger between Kennecott and Carborundum.

In 1968, Kennecott Copper Corporation made a hurried termination when it acquired Peabody Coal Company. In the geezerhood preceding the acquisition, Kennecott had undergo round-eyed swings in its profitability, which it was looking to offset by diversification. expend in another company in a opposite constancy was an intelligent decision; however, Peabody was the wrong company to do this with. Although Peabody had been fat and stable over the past few years leading(p) up to the acquisition, the internal rate of return related to the investment funds was not high enough to justify a procure of the company. Peabodys comprise of debt was .038. This was calculated by assuming a 40% tax rate and .095 rate on debt (Exhibit 3). There was a .095 interest rate on notes payable due June 30, 1998; therefore, we bring the rate of debt at the time of purchase would have been similar. Also, Peabodys woo of equity was .1397. This was calculated by using a riskless rate of .055, which was the rate of the 90-day T-bill in 1968. A beta of 1 was assumed and a .082 market risk premium was used. The travel mentioned experience was inflexible by taking the average returns on the short-term T-Bill rate from 1951-1975.

This rate was used because we know Peabody was a short-term investment and the years 1951-1975 give a much than accurate reflection of the market return than using the control from 1926-1987. Furthermore, the weight of debt and equity were .35 and .65 respectively. These figures were used because we are told that approximately 65% of Kennecotts net worth was tied up in Peabody. These figures gave a weighted average cost of capital of 9.70% . The IRR for this purchased was calculated! by using $621.5 million as the initial investment. This figure was fit(p) as a... If you want to get a full essay, devise it on our website: OrderEssay.net

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