Question
In: Finance
Merger Valuation with Change in Capital Structure Current target capital structure: Debt 30.00% Equity 70.00% Number...
| Merger Valuation with Change in Capital Structure | ||
| Current target capital structure: | ||
| Debt | 30.00% | |
| Equity | 70.00% | |
| Number of common shares outstanding | 1,000,000 | |
| Current debt amount | $10,180,000 | |
| Debt interest rate | 7.50% | |
| Risk-free rate | 3.00% | |
| Market risk premium | 7.00% | |
| Tax rate | 40.00% | |
| Beta | 1.30 | |
| Interest payments, Years 1 - 3 | $1,600,000 | |
| Growth rate | 6.00% | |
| Free cash flow, Year 1 | $2,500,000 | |
| Free cash flow, Year 2 | $2,900,000 | |
| Free cash flow, Year 3 | $3,300,000 | |
| Free cash flow, Year 4 | $3,950,000 | |
| Level of debt, Year 3 | $26,800,000 | |
| New interest rate at higher debt level | 8.50% | |
| New target capital structure: | ||
| Debt | 45.00% | |
| Equity | 55.00% | |
| Calculate target firm's levered cost of equity | Formulas | |
| rsL | #N/A | |
| Calculate target firm's unlevered cost of equity | ||
| rsU | #N/A | |
| Calculate target firm's unlevered value: | ||
| Unlevered horizon value of FCF | #N/A | |
| Unlevered value of operations | #N/A | |
| Calculate value of interest tax shields: | ||
| Tax shield, Year 1 | #N/A | |
| Tax shield, Year 2 | #N/A | |
| Tax shield, Year 3 | #N/A | |
| Tax shield, Year 4 | #N/A | |
| Tax shield, Horizon value | #N/A | |
| Value of tax shields | #N/A | |
| Calculate target firm's per share value to acquiring firm: | ||
| Value of operations | #N/A | |
| Target firm's equity value to acquiring firm | #N/A | |
| Per share value to acquiring firm | #N/A |
Solutions
Expert Solution
Please see the table below. The cells highlighted in yellow contain your answer. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.
jeff jeffy answered 2 years agoRelated Solutions
Merger Valuation with Change in Capital Structure VolWorld Communications Inc., a large telecommunications company, is evaluating...
Merger Valuation with Change in Capital Structure
VolWorld Communications Inc., a large telecommunications
company, is evaluating the possible acquisition of Bulldog Cable
Company (BCC), a regional cable company. VolWorld's analysts
project the following post-merger data for BCC (in thousands of
dollars, with a year end of December 31):
2016
2017
2018
2019
2020
2021
Net sales
$450.0
$518.0
$ 555.0
$ 600.0
$ 643.0
Selling and administrative expense
45.0
53.0
60.0
68.0
73.0
Interest
40.0
45.0
47.0
52.0
54.0
Total net operating capital...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the...
The firm's target capital structure is the mix of debt,
preferred stock, and common equity the firm plans to raise funds
for its future projects. The target proportions of debt, preferred
stock, and common equity, along with the cost of these components,
are used to calculate the firm's weighted average cost of capital
(WACC). If the firm will not have to issue new common stock, then
the cost of retained earnings is used in the firm's WACC
calculation. However, if...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the...
The firm's target capital structure is the mix of debt,
preferred stock, and common equity the firm plans to raise funds
for its future projects. The target proportions of debt, preferred
stock, and common equity, along with the cost of these components,
are used to calculate the firm's weighted average cost of capital
(WACC). If the firm will not have to issue new common stock, then
the cost of retained earnings is used in the firm's WACC
calculation. However, if...
If a change in capital structure increases the risk both of the firm’s equity and debt,...
If a change in capital structure increases the risk both of the
firm’s equity and debt, and there are no other financial claims,
does it imply that the firm’s risk has increased?
6. Mill Co. is considering to change its current capital structure (30% debt vs. 70% equity)...
6. Mill Co. is considering to change its current capital
structure (30% debt vs. 70% equity) to new capital structure (50%
debt vs. 50% equity). The 10-year T-Note is 2%and MRP is 6%. Its
current cost of equity is 11%.
What would Mill Co.'s NEW cost of equity be if Mill Co. decides
to adapt new capital structure? Assume tax rate to be 25%.
1) 9.87%
2) 13.94%
3)10.65%
4) 11%
15. Mill Co. wants to estimate its WACC Based...
Pearson Motors has a target capital structure of 30% debt and 70% common equity, with no...
Pearson Motors has a target capital structure of 30% debt and
70% common equity, with no preferred stock. The yield to maturity
on the company's outstanding bonds is 11%, and its tax rate is 40%.
Pearson's CFO estimates that the company's WACC is 14.00%. What is
Pearson's cost of common equity? Do not round intermediate
calculations. Round your answer to two decimal places.
Pearson Motors has a target capital structure of 35% debt and 65% common equity, with no...
Pearson Motors has a target capital structure of 35% debt and
65% common equity, with no preferred stock. The yield to maturity
on the company's outstanding bonds is 8%, and its tax rate is 40%.
Pearson's CFO estimates that the company's WACC is 13.10%. What is
Pearson's cost of common equity? Do not round intermediate
calculations. Round your answer to two decimal places.
%
David Ortiz Motors has a target capital structure of 40% debt and 60% equity.
Managerial Finance 650Problem 9-08 (WACC)David Ortiz Motors has a target capital structure of 40% debt
and 60% equity. The yield to maturity on the company's outstanding
bonds is 10%, and the company's tax rate is 25%. Ortiz's CFO has
calculated the company's WACC as 10.2%. What is the company's cost
of equity capital?Round your answer to the nearest whole number.
Petro Co. has a target capital structure that consists of 60% debt, and 40% equity, the...
Petro Co. has a target capital structure that consists of 60%
debt, and 40% equity, the company is considering a project (capital
budget) that costs $1,500,000 for the coming year. It is
forecasting net income of $800,000.
1- The equity needed for the capital budget is: *
$900,000
$600,000
$480,000
$320,000
None of the above
2- If the company needs to expand its project, the dividend it
can pay for shareholders is: *
$0
$200,000
$320,000
$480,000
None of the...
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield...
David Ortiz Motors has a target capital structure of 40% debt
and 60% equity. The yield to maturity on the company's outstanding
bonds is 10%, and the company's tax rate is 25%. Ortiz's CFO has
calculated the company's WACC as 10.2%. What is the company's cost
of equity capital? Round your answer to the nearest whole
number.
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