An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $103 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 $380 million financed with $330 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.
An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $103 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 $380 million financed with $330 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.
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
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Transcribed Image Text:An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $103 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 $380
million financed with $330 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.
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