An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $97 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 $320 million financed with $270 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 9.0 percent. Calculate the annual debt-service payments required on the debt. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service.
An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $97 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 $320 million financed with $270 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 9.0 percent. Calculate the annual debt-service payments required on the debt. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter26: Real Options
Section: Chapter Questions
Problem 3P: Wansley Lumber is considering the purchase of a paper company, which would require an initial...
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An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $97 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 $320 million financed with $270 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 9.0 percent.
Calculate the annual debt-service payments required on the debt.
Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service.
![An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $97 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 $320
million financed with $270 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest
rate of 9.0 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
million](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1527e219-5a4f-495e-b237-e00ff3f91e1c%2Ff9b4b164-e8eb-46cc-bea8-041c371a8f35%2F197ese_processed.jpeg&w=3840&q=75)
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 $97 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 $320
million financed with $270 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest
rate of 9.0 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
million
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