Suppose we are planning to buy a company with the following forecasts:
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Year
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1
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2
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3 & afterwards
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FCF
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$5 million
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$ 5.5 million
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3% constant growth rate
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|
Debt level
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$50 million
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$35 million
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Constant debt to equity ratio. Capital will be 50% debt and 50% equity, wd = ws= 0.5.
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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 1- Calculate the value of the debt tax shield.
Question 2 Calculate the horizon value of the target.
Question 3 -Calculate the value of operations.
Question 4 What is the highest offer price we can make? Is the acquisition feasible?
Question 5 - Why do the target's free cash flows vary from one acquirer to another?
Question 6 -What are the main disadvantages of the payback method for evaluating projects?