Question

A regional restaurant chain, Club Finance Rocks (CFR), is considering purchasing a smaller chain, AccountingIsOkToo Sandwiches (AIOT). The following post-merger data for the AIOT is projected. The values below are in millions. After the fourth year, the free cash flows and the tax shields will both grow at a constant rate of 4%. AIOT has $50 million of debt and $60 million of non-operating assets. Current stock price of the AIOT is $16 per share, with 12 million shares outstanding.

	Year 0	Year 1	Year 2	Year 3	Year 4
EBIT		$32	$33	$37	$38
Tax Expense		$3	$4	$4	$5
Total Operating Capital	$16	$23	$32	$38	$45
Interest Expense		$12	$14	$17	$20

Question: Assuming that the unlevered cost of equity is 15%, what is the unlevered value of operations?

	A.	$189.09 million
	B.	$156.33 million
	C.	$421.04 million
	D.	$207.42 million
	E.	$312.69 million

Answer 1

we wont consider interest expense and value of debt and Non operating assets in calculating Unlevered value of Operations

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