An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $109 million in free cash flow every year for five years, at which time it will be abandoned. A buyout firm proposes to purchase the company for $440 million financed with $390 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 6.5 percent. a. Calculate the annual debt-service payments required on the debt. b. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service. Note: Round your answers to 1 decimal place. a. Annual debt service payment b. Rate of return $ 93.9 million %

An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $109 million in free cash flow every year for five years, at which time it will be abandoned. A buyout firm proposes to purchase the company for $440 million financed with $390 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 6.5 percent. a. Calculate the annual debt-service payments required on the debt. b. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service. Note: Round your answers to 1 decimal place. a. Annual debt service payment b. Rate of return $ 93.9 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

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Question

An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $109 million in free
cash flow every year for five years, at which time it will be abandoned. A buyout firm proposes to purchase the company for $440
million financed with $390 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest
rate of 6.5 percent.
a. Calculate the annual debt-service payments required on the debt.
b. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service.
Note: Round your answers to 1 decimal place.
a. Annual debt service payment
b. Rate of return
$
93.9 million
%

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