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C09final-summer2008-solution

C09final-summer2008-solution - ANSWER 1 a MV of NoDebt...

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ANSWER 1: a. MV of NoDebt assets before the buyout = $350,000/0.08 = $4,375,000 3 Price = $4,375,000/100,000 = $43.75 per share b. 1. NPV buyout = -$925,000 + 117,500/0.10 = -$925,000 + 1,175,000 = $250,000 Price after announcement = (4,375,000+250,000)/100,000 = $46.25 9 2. NoDebt needs to issue $925,000/46.25 = 20,000 shares 3. MV of NoDebt Equity after acquisition = $4,375,000 = 1,175,000 = $5,550,000 4. Expected Return to NoDebt Equity holders = ($350,000 + 117,500)/5,550,000 = 0.084234 = 8.4234% 5. r WACC = 0.084234 = 8.4234% c. 1. Priceafter announcement = $46.25 per share 8 2. MV of NoDebt Equity after acquisition = $4,375,000 + 250,000 = $4,625,000 3. Expected return after purchase finalized = ($350,000+117,500+925,000(0.07))/4,625,000 = 0.08708 = 8.708% 4. ) 08708 . 0 ( 000 , 550 , 5 000 , 625 , 4 ) 07 . 0 ( 000 , 550 , 5 000 , 925 + = + = s B wacc r V S r V B r =0.011667 + 0.072568 = 0.084234
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ANSWER 2: a. 6 . 1 04 . 0 064 . 0 2 , = = = m m FDT s Cov σ β 6 ) ) ( ( f m s f s r r E r r - + = β = 0.05 + 1.6 (0.09 – 0.05) = 0.114 = 11.4% b. ( 29 + × × + - - + - = 114 . 1 057 . 1 2 . 0 114 . 0 2 . 0 4 . 0 000 , 20 114 . 0 114 . 1 1 1 ) 4 . 0 1 ( 000 , 10 000 , 20 $ 6 LL NPV = -$20,000 + 25,093 + 4835 = $9,928 8 ( 29 + × × + - - + - = 114 . 1 057 . 1 2 . 0 114 . 0 2 . 0 4 . 0 000 , 10 114 . 0 114 . 1 1 1 ) 4 . 0 1 ( 000 , 9 000 , 10 3 SL NPV ( 29 ( 29 3 3 114 . 1 114 . 1 057 . 1 2 . 0 114 . 0 2 . 0 4 . 0 000 , 10 114 . 0 114 . 1 1 1 ) 4 . 0 1 ( 000 , 9 000 , 10 ÷
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