In: Finance
Alpha Corporation has earnings before interest and tax (EBIT)
per annum in perpetuity of $200,000. The tax rate is 30%. The firm
is funded $50,000 of debt and $150,000 of equity. The cost of
equity is 18% and the cost of debt is 6%.
Given the information above, what is the appropriate discount rate
if earnings before interest and tax (EBIT) are used to calculate
the value of the firm?
A. |
20.79% |
|
B. |
25.71% |
|
C. |
18% |
|
D. |
14.55% |
|
E. |
None of the above |
2.
Firm A has a value of $500 million and Firm B has a value of
$300 million. Firm A has 1000 shares outstanding, and Firm B has
800 shares outstanding. Suppose that the merger would increase cash
flows of the combined firm by $5 million in perpetuity. Assuming
the cost of capital for the new firm is 5%.
Suppose that instead of paying cash, Firm A acquires B by offering
two (new) shares of A for every three shares of B. The net gain to
Firm A's shareholders is around:
A. |
$30 million |
|
B. |
$10 million |
|
C. |
$70 million |
|
D. |
$87 million |
|
E. |
None of the above |