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

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

Problem 1PS

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) Your firm has the following structure: you own all the shares of the Dixit paper cup company. Dixit has $2,000,000 of outstanding perpetual debt with a 10% coupon selling at par. Dixit is currently selling paper cups which produce earnings before interest of $210,000 per year. You receive the following offer from your engineer friend. He would help you liquidate Dixit’s assets and with the proceeds you could build solar powered scooters. Your financing would remain the same. You believe that there is a 75% chance that solar powered scooters would not be particularly successful. In this case they would generate only $100/year. However, there is a 25% chance that solar powered scooters would be very successful. In this case they would generate $500,000 per year. Assume your equity discount rate is 15%. Assume the firm pays no taxes. b) What is the value of the solar powered scooters investment assuming a 15% discount rate? c) What is the value of your equity under each of these…
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