INTERMEDIATE FINAN.MGMT.(LL)-W/MINDTAP
INTERMEDIATE FINAN.MGMT.(LL)-W/MINDTAP
13th Edition
ISBN: 9781337817363
Author: Brigham
Publisher: CENGAGE L
Question
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Chapter 26, Problem 2P

a)

Summary Introduction

To determine: The company V’s pre-acquisition levered cost of equity and unlevered cost of equity.

a)

Expert Solution
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Explanation of Solution

The computation of company V’s pre-acquisition levered cost of equity and unlevered cost of equity is as follows:

Current b = 1.4; rRF = 5%; RPM = 6%; current wd = 30%; T = 40%; rd = 8%,

rsL     = rRF+ RPM(b)              = 5% + 6%(1.4)              = 13.4%

rsU         =wdrd+ wsrsL =0.30(8%) + 0.70(13.4%)=11.78%

Hence, the levered cost of equity and unlevered cost of equity is 13.4% and 11.78% respectively.

b)

Summary Introduction

To determine: The unlevered value of operations.

b)

Expert Solution
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Explanation of Solution

The computation of unlevered value of operation is as follows:

Unlevered horizon value=FCF4(1+g)(rsU-gL)=3.57(1.05)(0.11780.05)=55.29

Unlevered value of operations =2.51.1178+2.9(1.1178)2+3.4(1.1178)3+3.57+55.29(1.1178)4=$44.69

Hence, the unlevered value of operation is $44.69.

c)

Summary Introduction

To determine: The value of tax shield.

c)

Expert Solution
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Explanation of Solution

The computation of value of tax shield is as follows:

Tax shield horizon value =TS4(1+g)(rsU-g)=0.5888 (1.05)(0.11780.05)=9.12

Value of tax shields=0.6001.1178+0.600(1.1178)2+0.600(1.1178)3+0.5888+9.12(1.1178)4=$7.67million.

Hence the value of tax shield is $7.67million.

d)

Summary Introduction

To determine: The total intrinsic value of operations, intrinsic value of company V’s equity to company H and company V’s intrinsic stock price per share.

d)

Expert Solution
Check Mark

Explanation of Solution

The computation of total value of operation is as follows:

Value of operations  = Unlevered Vops + Value of tax shields                              = $44.69 + $7.67                              = $52.36 million

Hence the total value of operation is $52.36 million.

The computation of equity value to acquirer is as follows:

Equity value to acquirer=Vops– Assumed debt=$52.36 million  $10.82 million=$41.54 million

Hence, the equity value of company V to company H is $41.54million.

The computation of intrinsic stock price per share is as follows:

Intrinsic value per share=(Equity value to acquirer)(Number of shares)=($41.54 million)(1 million shares)=$41.54 Per share.

Hence, the intrinsic stock price per share is $41.54per share.

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