Question: A company financed with 100% equity has a cost of capital equal to approximately 10% This firm has only one asset a chemical plant capable of generating $ 100 million per year in FCF (free cash flow) every year for five subsequent years, at which time the facility will be abandoned. A buyout firm offers to buy the company for $ 400 million financed with $ 350 million in debt to be repaid on five equal, end-of-year payments and carrying an interest rate of 6%
First calculate the annual debt-service payments required on the debt. Now ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt-service. Finally, assuming the company cost of capital is 10% does the buyout look attractive? Please explain