Case Study about a merger between Kennecott and Carborundum.

In 1968, Kennecott Copper Corporation make a hasty effect when it acquired Peabody Coal Company. In the geezerhood preceding the acquisition, Kennecott had be intimated mere(a) swings in its profitability, which it was looking to start out by diversification. Investing in another company in a different pains was an intelligent decision; however, Peabody was the upon company to do this with. Although Peabody had been lucub reckon and stable over the old few years leading(p) up to the acquisition, the internal graze of parry related to the investiture was not high enough to disengage a bargain for of the company. Peabodys plant of debt was .038. This was calculated by expect a 40% revenue rate and .095 rate on debt (Exhibit 3). There was a .095 engage rate on notes payable due June 30, 1998; therefore, we sour the rate of debt at the time of purchase would have been similar. Also, Peabodys cost of rectitude was .1397. This was calculated by victimization a perilless rate of .055, which was the rate of the 90-day T-bill in 1968. A beta of 1 was pretended and a .082 market risk premium was utilise. The last mentioned experience was inflexible by winning the average matters on the short T-Bill rate from 1951-1975.

This rate was used because we know Peabody was a short investment and the years 1951-1975 move on a more than spotless reflection of the market return than exploitation the figure from 1926-1987. Furthermore, the tip of debt and equity were .35 and .65 respectively. These figures were used because we atomic number 18 told that approximately 65% of Kennecotts lettuce worth was tied up in Peabody. These figures gave a weighted average cost of capital letter of 9.70%. The IRR for this purchased was calculated by using $621.5 million as the initial investment. This figure was determined as a... If you want to get a full essay, coordinate it on our website: Ordercustompaper.com

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