Question:
Bella Corp. is interested in acquiring Johnson Inc. Johnson has 1 million shares outstanding and a target capital structure consisting of 25% debt. Johnson's interest rate is 9.5%. Assume the risk free rate of interest is 5% and the market risk premium is 6%. Both companies have a 40% tax rate. Johnson's free cash flow is $4.5 million per year and is expected to grow at a constant rate of 2.5% a year. It's beta is 1.3. What is the value of Johnson's Operations?