Suppose that Portsea Inc. is thinking about acquiring a firm in its industry t $150 million. The acquisition is expected to increase Portsea's free cash flow by $20 million in the first year, and this contribution is expected to grow at a rate of 3% every year thereafter. Assume that Portsea currently maintains a debt-to-equity ratio of 0.80, its corporate tax rate is 30%, its cost of debt is 4% and its cost of equity is 14%. Further assume that Portsea will maintain a constant debt - equity ratio for the acquisition. What is the free cash flow to equity (FCFE) for the acquisition in year 0?

Suppose that Portsea Inc. is thinking about acquiring a firm in its industry t $150 million. The acquisition is expected to increase Portsea's free cash flow by $20 million in the first year, and this contribution is expected to grow at a rate of 3% every year thereafter. Assume that Portsea currently maintains a debt-to-equity ratio of 0.80, its corporate tax rate is 30%, its cost of debt is 4% and its cost of equity is 14%. Further assume that Portsea will maintain a constant debt - equity ratio for the acquisition. What is the free cash flow to equity (FCFE) for the acquisition in year 0?

Name: Suppose that Portsea Inc. is thinking about acquiring a firm in its i
Uploaded: 2024-03-20T06:33:21.000Z
Channel: Bartleby
Description: Suppose that Portsea Inc. is thinking about acquiring a firm in its industry for $150 million. The acquisition is expected to increase Portsea's free cash flow by $20 million in the first year, and thiscontribution is expected to grow at a rate of 3

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

See similar textbooks

Related questions

Q: Heavy Metal Corporation is expected to generate the following free cash flows over the next five…

A: Certainly! Let's break down the calculations step by step.a. Enterprise Value Calculation using…

Q: Consider a firm with an EBITDA of $16,600,000 and an EBIT of $12,300,000. The firm finances its…

A: EBIT = $12,300,000 Numberof shares outstanding = 11,800,000 Debt = $53,600,000Interest rate =…

Q: Consider a firm with an EBITDA of $16,800,000 and an EBIT of $12,400,000. The firm finances its…

A: EBIT = $12,400,000 Numberof shares outstanding = 11,900,000 Debt = $53,800,000Interest rate =…

Q: FrontLier Company is planning to acquire Stint Corp. The additional pre-tax income from the…

A: The maximum price should be equal to the present value of the total benefits from the acquisition of…

Q: Am. 205.

A: I'd be glad to help you with the Restex valuation problem, but there seems to be a discrepancy in…

Q: A corporation plans to buy out a supplier and needs $2 million in new capital to do so. The…

A: Cost of debt and cost of equity are two components of a company's capital structure which represent…

Q: Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares…

A: in this we have to calculate weighted average cost of capital and than find out intrinsic value.

Q: Suppose a firm has a EBIT of $450, Depreciation of $65, taxes of $50, change in NWC of $35, and net…

A: The value of the firm is the present value of all the future cash flows expected from the firm…

Q: Tropetech Inc. has an expected net operating profit after taxes, EBIT(1 – T), of $16,300 million in…

A: Free cash flows are cash flows that are available for investors after firm has met all operating…

Q: Suppose Alcatel-Lucent has an equity cost of capital of 10.1%, market capitalization of $11.52…

A: Capital budgeting is the procedure of analyzing potential projects and allocating the company's…

Q: Consider a firm with an EBITDA of $14,200,000 and an EBIT of $11,100,000. The firm finances its…

A: EPS is crucial for investors and analysts because it provides insight into the profitability of a…

Q: Dyrdek Enterprises has equity with a market value of $12.7 million and the market value of debt is…

A: weight of equity= 12.7/(12.7 + 4.5)= 0.738372093Weight of debt = 4.5/(12.7 +4.5)= 0.261627907WACC =…

Q: Assume that XYZ, Inc. is a single asset firm that is expected to generate $5 million in net cash…

A: The cash flow of $5000000 is the cash flow before paying any obligations such as interest. Hence,…

Q: Prokter and Gramble (PG) currently has $25 billion outstanding debt. PG has a cost of equity capital…

A: Market Value of share refers to the value at which specific shares are traded over the stock…

Q: Consider a firm that is currently all-equity financed. The firm produces a perpetual EBIT of $90m…

A: EBIT = $90 million Corporate tax rate = 30% Initial level of debt = $400 million Required return on…

Q: Dyrdek Enterprises has equity with a market value of $1.8 million and the market value of debt is…

A: NPV is defined as the sum of the present values of all future cash inflows less the sum of the…

Q: AGE Inc.'s assets in place will be worth either $ 250 Million or $100 million in one year depending…

A: a. Yes, AGE Inc. should undertake the project. The project offers a safe return of $75 million in…

Q: Capital structure analysis) The Karson Transport Company currently has net operating income of…

A: Ratio analysis is a way of financial analysis that include the calculation and interpretation of…

Q: Cede & Co. expects its EBIT to be $163000 every year forever. The company can borrow at 8 percent.…

A: To determine the present value of future cash flows, the WACC is frequently employed as a discount…

Q: The managers of an all-equity firm are interested in borrowing $1.2 million and using the proceeds…

A: Value of unlevered firm = EBIT-*(1-Taxes)/ Cost of equity= $700,000*(1-21%)/13%= $4,253,846.154

Q: An all-equity firm that has projected perpetual EBIT of $204,000 per year. The cost of equity is…

A: Unlevered Firm: The unlevered firm is the firm which contains only equity capital in its capital…

Q: You expect that Tin Roof will generate a perpetual stream of EBIT at $92,000 annually. The firm's…

Q: Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $162,000 per year. The…

A: The value of the levered firm needs to be determined, starting with the value of the unlevered firm.…

Q: Dyrdek Enterprises has equity with a market value of $10.4 million and the market value of debt is…

A: The objective of the question is to calculate the Net Present Value (NPV) of a new project for…

Q: Cede & Co. expects its EBIT to be $163000 every year forever. The company can borrow at 8 percent.…

A: Here, Particulars Values EBIT $ 163,000.00 Before-tax cost of debt 8.00% Cost of equity…

Concept explainers

Financial Ratios

A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.

Return on Equity

The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.

Topic Video

Question

Suppose that Portsea Inc. is thinking about acquiring a firm in its industry for $150 million. The acquisition is expected to increase Portsea's free cash flow by $20 million in the first year, and this
contribution is expected to grow at a rate of 3% every year thereafter. Assume that Portsea currently maintains a debt-to-equity ratio of 0.80, its corporate tax rate is 30%, its cost of debt is 4%,
and its cost of equity is 14% . Further assume that Portsea will maintain a constant debt - equity ratio for the acquisition. What is the free cash flow to equity (FCFE) for the acquisition in year 0 ?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Introdcution of free cash flow to equity

VIEW

Step 2: Calculation of Free cash flow to equity

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

The firm want to add some leverage to their firm as they are running their business at a 0% debt level.The firm has a projected EBIT of $198,000 and can issue debt at 5.8% per annum. They wish to increase their D/E ratio to 1.08 at the end of the year. The firm estimates their cost of equity to be 14.1% and pays 34% in taxes per year. what is the firm value after it adds this leverage to the firm?
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $153,000 per year. The cost of equity is 11.1 percent and the tax rate is 34 percent. The firm can borrow perpetual debt at 6.1 percent. Currently, the firm is considering taking on debt equal to 63 percent of its unlevered value. What is the firm's levered value? Multiple Choice $1,007,162 $818,757 $1,104,594 $909,730 $1,189,563
Tool Manufacturing has an expected EBIT of $81,000 in perpetuity and a tax rate of 24 percent. The firm has $230,000 in outstanding debt at an interest rate of 5.1 percent, and its unlevered cost of capital is 10.9 percent. What is the value of the firm according to M&M Proposition I with taxes? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of the firm
In year 1, AMC will earn $2,900 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 45%. Right now, the firm has $7,250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.7% per year. Suppose the risk-free rate equals 4.5%, and the expected return on the market equals 9.9%. The asset beta for this industry is 1.93. Using the WACC, the expected return for AMC equity is 25.71%. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow using the FTE method? (Hold all intermediate calculations to at least 6 decimal places and round to the…
Dyrdek Enterprises has equity with a market value of $10.9 million and the market value of debt is $3.60 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.7 percent. The new project will cost $2.22 million today and provide annual cash flows of $581,000 for the next 6 years. The company's cost of equity is 11.11 percent and the pretax cost of debt is 4.89 percent. The tax rate is 21 percent. What is the project's NPV? Multiple Choice $230,173 $375,414 $237,180 $219,241 $512,072
criticism. structure? Explain M-M Theory with their 5 The Holland Company expects perpetual earnings before interest and taxes (EBIT) of $4 6 million per year. The firm's after-tax, all-equity discount rate (ro) is 15%. Holland is subject to a corporate tax rate of 35%. The pretax cost of the firm's debt capital is 10% per annum, and the firm has $10 million of debt in its capital structure. i. ii. iii. Question: 7 What is Holland's value? What is Holland's cost of equity (rs)? What is Holland's weighted average cost of capital (Twacc)?
A firm has Sales of $25,000,000, total assets of $22,000,000, current assets of $8,000,000, spontaneous liabilities of $5,000,000, a profit margin of 5 percent, a tax rate of 40%, and a dividend payout rate of 20 percent. Sales are expected to increase to $28,000,000 for the coming year, and the firm will need to increase its fixed assets at this level of sales (that is, fixed assets will increase proportionately with sales). Given this information, and using the equation approach, determine the additional funds needed for the coming year. O $950,000 O $1.010,000 Ⓒ$920.000 $980,000 O $1,040,000
The Black Bird Company plans an expansion. The expansion is to be financed by selling $21 million in new debt and $57 million in new common stock. The before-tax required rate of return on debt is 9.77% percent and the required rate of return on equity is 13.11% percent. If the company is in the 34 percent tax bracket, what is the weighted average cost of capital?
New Energy’s capital structure today is $1,347 million in Long Term Debt and $1,655 million in Common Equity. If its debt were issued today, New Energy would pay an interest rate of 8.2%/year (before tax). New Energy’s Cost of Equity is estimated to be 12%/year. Given a tax rate of 30%, what is New Energy’s Weighted Average Cost of Capital (WACC)? (Your answer should be a % carried to 2 places.)
Duke Inc. is considering to change its capital structure of a $1 million:$3 million debt-equity mix (in terms of market values), by taking out a $3 million loan which is used to pay a large dividend to shareholders. The firm’s tax rate is 40%. After the dividend has been paid, what will be the firm’s total equity value?
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $183,000 per year. The cost of equity is 13.1 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering converting to a debt–equity ratio of .93. What is the firm's levered value? MM assumptions hold. A. $829,786 B. $1,215,262 C. $1,155,579 D. $997,511 E. $921,985
What is Ningbo Shipping's WACC if it's after tax cost of retained earnings is 14%, and the firm's market value of debt is $40 million while the market value of it's equity is $60 million?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS