Use the following information
Suppose we are planning to buy a company with the following forecasts:
|
Year |
1 |
2 |
3 & afterwards |
|
FCF |
$5 million |
$ 5.5 million |
3% constant growth rate |
|
Debt level |
$50 million |
$35 million |
Constant debt to equity ratio. Capital will be 50% debt and 50% equity, wd = ws = 0.5. |
The cost of debt is 5%
The cost of equity is 20%
The tax rate is 40%
The company has 15 million shares outstanding
The current stock price is $2.05
The company is currently holding no financial assets.
The company has $3,000,000 in debt.
WACC, the cost of capital, is equal to 11.5%
RSU, the cost of unlevered equity, is equal to 12.5%
Question
Calculate the value of the debt tax shield.
Question
Calculate the horizon value of the target.
Question
Calculate the value of operations.
Question
What is the highest offer price we can make? Is the acquisition feasible?
Question
Why do the target’s free cash flows vary from one acquirer to another?
Question
What are the main disadvantages of the payback method for evaluating projects?
