Question 1.a) Based on the information provided in the “A” case and especially in the Exhibit 7 the most that CSX should pay for Conrail should be $93.42 per share (calculations are attached hereto as Exhibit 1). I assumed that the correct or required discount rate to be used in the DCF analysis should be the CSX’s cost of equity which is 15.93%. Based in this analysis – which reflects the expected synergies arising from the deal - CSX could still justify an increase in its offer by $4.35 which would imply an increase in the total value of the deal of 393.675 million dollars. Question 1.b) I believe that the proposed synergies are reasonable when compared with similar previous mergers in the railroad industry (calculations are attached hereto as Exhibit 2). In terms of the projected merger synergies the CSX-Conrail merger should originate 550 million dollars in the year 2000 and thereafter they should grow at the rate of inflation – 3% (Exhibit 7 case “A”). According with the data in case “A”, Exhibit 6, this value is in line with both the Santa Fe Pacific merger (560 million dollars) and the Southern Pacific merger (660 million dollars) but it is substantially higher than the Chicago and Northwestern merger (250 million). Also in terms of projected synergies as a percent of the Target´s Operating Expenses I believe that the projection of the CSX-Conrail merger is reasonable as its value is lower than its comparables – 14.69% compared to 22.3% (Santa Fe Pacific), 27.7% (Chicago and North Western) and 24.5% (Southern Pacific). As we do not have any projection for Conrail’s operating expense in the year 2000 I assumed that such value should increase at the projected rate of inflation (3%). Question 1.c) Considering that CSX’s stock price was $46.75 the offer was $89.07 per share (blended value). This meant that if Conrail’s stock price was $71.00, CSX was offering to pay a premium of 25.45% (calculations are attached hereto as Exhibit 3). Also if we...
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