Question

Standish Inc. is a conglomerate that is expected to generate $100 million in after-tax operating income next year, growing at 2.50% a year in perpetuity. It is planning to sell of its steel division for $200 million and you have been given the following information on the company and its steel division. Estimate the value of Standish's equity after the divestiture assuming that it has no cash and no debt, pre divestiture, but plans to hold the divestiture proceeds as a cash balance after the divestiture.

	Consolidated	Steel Division only
Expected EBIT (1-t) next year Invested Capital Expected growth rate Cost of capital	100 800 2.50% 7.50%	12 160 2.50% 7.50%

• A.

  $1,240.00

• B.

  $1,440.00

• C.

  $1,640.00

• D.

  $1,760.00

• E.

  $1,960.00

Answer 1