Adjusted Price for Opportunity cost

There is another angle to determine the price. The future benefits can be adjusted with the current market price to determine the exchange price. It can be determined by using following facts and assumptions
1997 1998 1999 2000 2001

Total Gain in Operating Income

188

396

550 Terminal Value

567

Terminal Value (growing perpetuity) TV growth rate 1% Tax Rate 35% Change in Profit After Tax Discount rate (Ka) 11.4% Discount factor Present Value of Change in PAT Present Value # of Conrail Acquisition Shares Per Share Present Value
CSX's VALUATION OF CONRAIL

5490

0 0.897 0 2808 90.5

$31

122 0.805 98

257 0.723 186

358 0.649 232

3937 0.582 2291

Base Value Present Value if Acquire Conrail Total Value

$71.00 $31
$102

It indicates that the every share of Conrail should be bought at the price of $ 102 but another premium is not considered here. If Conrail merge with Norfolk Southern, then CSX have to bare operating loss. For this reason the CSX should pay another premium to Conrail shareholder for not allowing to merge with Norfolk Southern. The premium value and the share at which Conrail shares should be bought can be calculated in following way 1997 0 1998 (40) 1999 (66) 2000 (105) 2001 (130)

Total CSX loss in Operating Income

Terminal Value (growing perpetuity) TV growth rate 1% Tax Rate 35% Change in Profit After Tax Discount rate 11.4% (Ka) Discount factor 11.4% calculated 0.897 0.805 0.723 (26) (43) (68)

(1118)

(85)

0.649

Present Value of Change in PAT Present Value # of Conrail Acquisition Shares Per Share Present Value Present Value # of CSX Shares Present Value per CSX Share
CSX's VALUATION OF CONRAIL

(23) (887) 90.5

(9.81)

(35)

(49)

(780)

(887) 213.6 (4.15)

Base Value Present Value if Acquire Conrail PV of Loss Avoided from not acquiring Total Value

$71.00 $31 $9.81

$111

That means after the opportunity cost adjustment the shares should be sold to CSX at the price of $ 111