Carlson Airlines
Case 32
Merger Analysis and Cash Flow
Purpose: The case demonstrates the use of capital budgeting techniques in a merger analysis. There are
a number of tax implications the student must consider. The student will also evaluate the impact of
terminal value on the analysis. This factor is frequently omitted in cases of this nature. The importance
of the growth rate is demonstrated as are the overall dimensions of the merger analysis.
Relation to Text: The case should follow Chapter 20.
Complexity: The case is of moderate difficulty and should require 45 minutes.
Solutions
1.
Selling and Administrative Expense
Depreciation Expense
Earnings before Taxes
Taxes (30%)
Plus Depreciation
Cash Flow
2.
3
4
5
6
7
8
10
3.
Year
Projected
Cash Flow
10%
Discount
Rate
Present Value
1
8,292,000
.909
$7,537,428
2
9,287,040
.826
7,671,095
3
10,401,484
.751
7,811,514
4
11,649,662
.683
7,956,719
5
13,047,621
.621
8,102,573
6
14,613,335
.564
8,241,921
7
16,366,935
.513
8,396,238
8
18,330,967
.467
8,560,562
9
20,530,683
.424
8,705,001
10
22,994,364
.386
8,875,825
Sum of Present Value $81,858,876
Sales
$33,000,000
Cost of Goods Sold
19,440,000
Year
Projected Cash Floor (12% Growth)
2
9,287,040
4. Sales Price $140,000,000
Taxes (15%) 21,000,000
5. Total Proceeds
Sum of Present Value $81,858,876