A PE firm has decided to take on $50 million in debt to finance the acquisition of an unlevered target company. The PE firm plans to repay $5 million every year for the next 5 years. After Year 5 debt is expected to remain constant indefinitely. The cost of debt is 8% and the applicable tax rate is 28%. The table below shows the expected debt outstanding and interest expense (based on debt outstanding at the end of last year) [in millions]: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 $45 $40 $35 $30 $25 $4 $3.6 $3.2 $2.8 $2.4 Debt Outst. $50 Interest (8%) If the unlevered value of the target company is $70 million, what is the maximum that the PE firm can offer for the target company (after taking on $50 million debt]? $78.41 million $73.25 million $70 million $76.54 million $75.0 million
A PE firm has decided to take on $50 million in debt to finance the acquisition of an unlevered target company. The PE firm plans to repay $5 million every year for the next 5 years. After Year 5 debt is expected to remain constant indefinitely. The cost of debt is 8% and the applicable tax rate is 28%. The table below shows the expected debt outstanding and interest expense (based on debt outstanding at the end of last year) [in millions]: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 $45 $40 $35 $30 $25 $4 $3.6 $3.2 $2.8 $2.4 Debt Outst. $50 Interest (8%) If the unlevered value of the target company is $70 million, what is the maximum that the PE firm can offer for the target company (after taking on $50 million debt]? $78.41 million $73.25 million $70 million $76.54 million $75.0 million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
A 154.
![A PE firm has decided to take on $50 million in debt to finance the acquisition of an
unlevered target company. The PE firm plans to repay $5 million every year for the next 5
years. After Year 5 debt is expected to remain constant indefinitely. The cost of debt is 8%
and the applicable tax rate is 28%.
The table below shows the expected debt outstanding and interest expense (based on debt
outstanding at the end of last year) [in millions]:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
$45 $40 $35 $30 $25
$4
$3.6 $3.2 $2.8 $2.4
Debt Outst. $50
Interest (8%)
If the unlevered value of the target company is $70 million, what is the maximum that the PE
firm can offer for the target company (after taking on $50 million debt]?
$78.41 million
$73.25 million
O $70 million
O $76.54 million
$75.0 million](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcba05d60-d3bd-4808-bb9d-31b77b9f9189%2F295be865-9da8-48f2-b2b0-76242f82b6ad%2F8wqpjs7_processed.png&w=3840&q=75)
Transcribed Image Text:A PE firm has decided to take on $50 million in debt to finance the acquisition of an
unlevered target company. The PE firm plans to repay $5 million every year for the next 5
years. After Year 5 debt is expected to remain constant indefinitely. The cost of debt is 8%
and the applicable tax rate is 28%.
The table below shows the expected debt outstanding and interest expense (based on debt
outstanding at the end of last year) [in millions]:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
$45 $40 $35 $30 $25
$4
$3.6 $3.2 $2.8 $2.4
Debt Outst. $50
Interest (8%)
If the unlevered value of the target company is $70 million, what is the maximum that the PE
firm can offer for the target company (after taking on $50 million debt]?
$78.41 million
$73.25 million
O $70 million
O $76.54 million
$75.0 million
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