Mantra Corporation is interested in acquiring Corlos Corporation. Corlos has 20 million shares outstanding and a target capital structure consisting of 40 percent debt and 60 percent equity. The debt interest rate is 9%. Assume that the risk-free rate of interest is 2% and the market risk premium is 10%.
Corlos' free cash flow (FCF0) is $10 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.2. Corlos has $8 million in debt. The tax rate for both companies is 35%.
a. Calculate the required rate of return on equity using equation: rs= rRF + RPM
b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs
c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g)
d. Calculate the value of the company's equity, using equation: Vs = Vops - debt
e. Calculate the current value of the company's stock.