{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# answers-odd-problems-ch25 - Chapter 25 Mergers LBOs...

This preview shows pages 1–3. Sign up to view the full content.

Chapter 25 Mergers, LBOs, Divestitures, and Holding Companies SOLUTIONS TO END-OF-CHAPTER PROBLEMS 25-1 FCF 1 = 2.00(1.05) = \$2.1 million; g = 5%; b = 1.4; r RF = 5%; RP M = 6%; w d = 30%; T = 40%; r d = 8% V ops = ? P 0 = ? r s = r RF + RP M (b) = 5% + 6%(1.4) = 13.4%. WACC = w d r d (1-T) + w s r s = 0.30(8%)(0.60) + 0.70(13.4%) = 10.82% V ops = g WACC ) g 1 ( FCF 0 - + = 05 . 0 1082 . 0 1 . 2 \$ - = \$36.08 million V S = V ops – debt = 36.08 – 10.82 = \$25.26 million Price = 25.26 million / 1 million shares = \$25.26 / share. 25-3 On the basis of the answers in Problems 25-1 and 25-2, the bid for each share should range between \$25.26 and \$41.54. Answers and Solutions: 25 - 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
25-5 a. The appropriate discount rate reflects the riskiness of the cash flows. Thus, it is Conroy’s unlevered cost of equity that should be used to discount the free cash flows and tax shields in years 1-4. The horizon value should be calculated using Conroy’s WACC, adjusting for the increased leverage. Since Conroy’s b = 1.3, its current cost of equity, r sL = 6% + 1.3(4.5%) = 11.85%. Since its percentage of debt is 25% and the rate on its debt is 9%, its unlevered cost of equity is r sU = w d r d + w s r sL = 0.25(9%) + 0.75 (11.85%) = 11.14% At the new capital structure of 40 percent debt with a rate of 9.5 percent, the new
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 3

answers-odd-problems-ch25 - Chapter 25 Mergers LBOs...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online