Total Assets = $7.5 billion Total Debt = $2.5 billion Total Equity = $5.0 billion The debt consists of $2.5 billion in face value of perpetual bonds which has the market value of $1 billion. The equity consists of 100 million shares, currently selling in the market at $90 per share. The company is considering a business expansion to the gambling industry by acquiring a casino which generates $15 million free cash flow per year indefinitely. ABC is planning to maintain the industry average leverage ratio for the casino. Companies that operate purely in the gambling industry have an average debt-equity ratio (measured at market value) of one. The cost of equity for this expansion is 13.5% and the yield to maturity of the firm's bond is 10%. The company's tax rate is 35%. What is the maximum price you would pay for the casino in order for the acquisition to be acceptable? a. $75.0 million 78.9 million C. $90.0 million d. $100.0 million e. $150.0 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
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Total Assets =
$7.5 billion
Total Debt = $2.5 billion
Total Equity = $5.0 billion
The debt consists of $2.5 billion in face value of perpetual bonds which has the market value of $1 billion. The equity consists of
100 million shares, currently selling in the market at $90
per
share.
The company is considering a business expansion to the gambling industry by acquiring a casino which generates $15 million free
cash flow per year indefinitely. ABC is planning to maintain the industry average leverage ratio for the casino. Companies that
operate purely in the gambling industry have an average debt-equity ratio (measured at market value) of one.
The cost of equity for this expansion is 13.5% and the yield to maturity of the firm's bond is 10%. The company's tax rate is 35%.
What is the maximum price you would pay for the casino in order for the acquisition to be acceptable?
a. $75.0 million
O b. $178.9 million
OC. $90.0 million
Od. $100.0 million
O e. $150.0 million
Transcribed Image Text:Total Assets = $7.5 billion Total Debt = $2.5 billion Total Equity = $5.0 billion The debt consists of $2.5 billion in face value of perpetual bonds which has the market value of $1 billion. The equity consists of 100 million shares, currently selling in the market at $90 per share. The company is considering a business expansion to the gambling industry by acquiring a casino which generates $15 million free cash flow per year indefinitely. ABC is planning to maintain the industry average leverage ratio for the casino. Companies that operate purely in the gambling industry have an average debt-equity ratio (measured at market value) of one. The cost of equity for this expansion is 13.5% and the yield to maturity of the firm's bond is 10%. The company's tax rate is 35%. What is the maximum price you would pay for the casino in order for the acquisition to be acceptable? a. $75.0 million O b. $178.9 million OC. $90.0 million Od. $100.0 million O e. $150.0 million
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