Part 2 In November of 1988, KKR, an investment firm, won a bidding war to buy all of the shares (250.612 million) of RJR Nabisco for $108 per share. RJR shares had been trading for $55 prior to the buyout. The purchase was debt financed ($27.06609 billion). The new debt was added to the $3.70968 billion of debt that predated the buyout. The new debt resulted in a debt- to-value ratio of 83.467% which RJR was committed to maintaining in perpetuity. Analysts expected RJR to generate free cash flow of $1.35 billion at the end of 1989. Assume that cash flows occur on December 31 and today is January 1, 1989. Analysts expected RJR's cash flow to grow at 5% in perpetuity. RJR's cost of debt was 10% and its cost of unlevered equity was 12%. The tax rate was 40%. What was the value of KKR's equity in the company after the buyout (on January 1, 1989)? Express your answer in billions of dollars rounded to one decimal place. B
Part 2 In November of 1988, KKR, an investment firm, won a bidding war to buy all of the shares (250.612 million) of RJR Nabisco for $108 per share. RJR shares had been trading for $55 prior to the buyout. The purchase was debt financed ($27.06609 billion). The new debt was added to the $3.70968 billion of debt that predated the buyout. The new debt resulted in a debt- to-value ratio of 83.467% which RJR was committed to maintaining in perpetuity. Analysts expected RJR to generate free cash flow of $1.35 billion at the end of 1989. Assume that cash flows occur on December 31 and today is January 1, 1989. Analysts expected RJR's cash flow to grow at 5% in perpetuity. RJR's cost of debt was 10% and its cost of unlevered equity was 12%. The tax rate was 40%. What was the value of KKR's equity in the company after the buyout (on January 1, 1989)? Express your answer in billions of dollars rounded to one decimal place. B
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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Transcribed Image Text:Part 2
In November of 1988, KKR, an investment firm, won a bidding war to buy all of the shares (250.612 million) of RJR Nabisco
for $108 per share. RJR shares had been trading for $55 prior to the buyout. The purchase was debt financed ($27.06609
billion). The new debt was added to the $3.70968 billion of debt that predated the buyout. The new debt resulted in a debt-
to-value ratio of 83.467% which RJR was committed to maintaining in perpetuity. Analysts expected RJR to generate free
cash flow of $1.35 billion at the end of 1989. Assume that cash flows occur on December 31 and today is January 1, 1989.
Analysts expected RJR's cash flow to grow at 5% in perpetuity. RJR's cost of debt was 10% and its cost of unlevered equity
was 12%. The tax rate was 40%.
What was the value of KKR's equity in the company after the buyout (on January 1, 1989)? Express your answer in billions of
dollars rounded to one decimal place.
B
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