You are Chief Financial Officer of the ABC Corporation. ABC has two divisions, one of which distributes alcohol, while the other manufactures bottles for brewers and beverage companies. ABC has a book value balance sheet with: 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. $90.0 million b. $75.0 million c. $178.9 million d. $150.0 million e. $100.0 million
You are Chief Financial Officer of the ABC Corporation. ABC has two divisions, one of which distributes alcohol, while the other manufactures bottles for brewers and beverage companies. ABC has a book value
|
Total Assets = $7.5 billion |
Total Debt = $2.5 billion |
|
Total Equity = $5.0 billion |
The debt consists of $2.5 billion in face
The company is considering a business expansion to the gambling industry by acquiring a casino which generates $15 million
The
What is the maximum price you would pay for the casino in order for the acquisition to be acceptable?
| a. |
$90.0 million |
|
| b. |
$75.0 million |
|
| c. |
$178.9 million |
|
| d. |
$150.0 million |
|
| e. |
$100.0 million |
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