answers-odd-problems-ch25

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

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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
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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
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This note was uploaded on 04/12/2011 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.

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

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