Question

Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Rose's free cash flow by $5 million the firs year, and this contribution is expected to grow at a rate of 3% every year there after. Rose currently maintains a debt to equity ratio of 1, its marginal tax rate is 40%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition.

51. The Free Cash Flow to Equity (FCFE) for the acquisition in year 0 is closest to:

a. $5 million

B. $100 million

C. -$100 million

D. -$50 milllion

52. The Free Cash Flow-to-Equity (FCFE) for the acquisition in year 1 is closest to:

A. $4.7 million

B. $6.5 million

C. $8.3 million

D. $6.8 million

Answer #1

51) The free cash to equity will be = Cash from operating activites - Capital expenditure + New debt issued

Hence = -$100Million + $50millions = -$50millions **Option
D**

52)

As the company expects to maintain a growth rate of 3% yearly. and debt equity ratio has to be kept constant hence debt should be increased by 3% i.e. $50M * 3% = $1.5M

Interest of existing Debt = $50M * 6% = $3M

Interest after Tax = $3M * (1-40%) = $1.8M

CAsh from operating activity = $5M -$1.8M = $3.2M

FCFE = Cash from operating activites**($3.2M)** -
Capital expenditure(0) + New debt issued($1.5M)

FCFE = $4.7M

**Option A**

and firm is going to maintain same debt equity ratio. hence Incremental value of debt will be $50Million

Suppose that Ret is considering the acquisition of another firm
in its industry for $100 million. The acquisition is expected to
increase Ret’s free cash flow by $5 million the first year, and
this contribution is expected to grow at a rate of 3% every year
thereafter. Ret currently maintains a debt to equity ratio of 1,
its corporate tax rate is 21%, its cost of debt rD is 6%, and its
cost of equity rE is 10%. Ret will...

Use the information for the question(s) below. Flagstaff
Enterprises is expected to have free cash flow in the coming year
of $8 million, and this free cash flow is expected to grow at a
rate of 3% per year thereafter. Flagstaff has an equity cost of
capital of 13%, a debt cost of capital of 7%, and it is in the 35%
corporate tax bracket. If Flagstaff currently maintains a .5 debt
to equity ratio, then the value of Flagstaff...

These statements are true of false? Explain.
1) In DCF valuation, a company can increase its return on equity
(ROE) by increasing
its leverage ratio if and only if its return on capital (ROC)
exceeds its after-tax cost of
debt (rd x (1 - Tc)). (Assume all other inputs are fixed.)
2) In the context of the dividend discount model (DDM), a
company can always increase
its intrinsic equity value by increasing its dividend payout ratio
if and only if...

Suppose? Alcatel-Lucent has an equity cost of capital of 10.4
%?, market capitalization of $ 11.52 ?billion, and an enterprise
value of $ 16 billion. Assume? Alcatel-Lucent's debt cost of
capital is 6.1 %?, its marginal tax rate is 36 %?, the WACC is 8.58
%?, and it maintains a constant? debt-equity ratio. The firm has a
project with average risk. Expected free cash? flow, debt?
capacity, and interest payments are shown in the? table:
Year 0 1 2 3...

Firm Valuation Schultz Industries is considering the purchase of
Arras Manufacturing. Arras is currently a supplier for Schultz, and
the acquisition would allow Schultz to better control its material
supply. The current cash flow from assets for Arras is $6.8
million. The cash flows are expected to grow at 8% for the next 5
years before leveling off to 4% for the indefinite future. The cost
of capital for Shultz and Arras is 12% and 10%, respectively. Arras
currently has...

6) Suppose Alcatel-Lucent has an equity cost of capital of
10%, market capitalization of $10.80 billion, and an enterprise
value of $14.4 billion. Suppose Alcatel-Lucent's debt cost of
capital is 6.1% and its marginal tax rate is 35%.
a. What is Alcatel-Lucent's WACC?
b. If Alcatel-Lucent maintains a constant debt-equity ratio,
what is the value of a project with average risk and the expected
free cash flows as shown here,
Year 0, 1, 2, 3
FCF ($ million) -100, 50,...

Quantitative Problem 1: Assume today is
December 31, 2016. Barrington Industries expects that its 2017
after-tax operating income [EBIT(1 – T)] will be $440 million and
its 2017 depreciation expense will be $60 million. Barrington's
2017 gross capital expenditures are expected to be $100 million and
the change in its net operating working capital for 2017 will be
$25 million. The firm's free cash flow is expected to grow at a
constant rate of 6.5% annually. Assume that its free...

Our acquisition target is a privately held company in a growing
industry. The target has recently borrowed $100 million to finance
its expansion; it has no other debt or preferred stock. It pays no
dividends and currently has no marketable securities. We expect the
company to produce free cash flows of -$10 million in one year, $30
million in two years, and $36 million in three years. After three
years, free cash flow will grow at a rate of 5%....

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt-equity ratio of .40, but the industry target debt-equity ratio
is .45. The industry average beta is 1.20. The market risk premium
is 6.8 percent and the risk-free rate is 4.4 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 22 percent. The project requires an
initial outlay...

Suppose Alcatel-Lucent has an equity cost of capital of 10.7
%,market capitalization of$ 10.50 billion, and an enterprise value
of $15
billion. Suppose Alcatel-Lucent's debt cost of capital is 7.2 %
and its marginal tax rate is 34 %
a. What is Alcatel-Lucent's WACC?
b. If Alcatel-Lucent maintains a constant debt-equity ratio,
what is the value of a project with average risk and the expected
free cash flows as shown here,
Year 0 1 2 3
FCF ($ million) -100 ...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 8 minutes ago

asked 11 minutes ago

asked 13 minutes ago

asked 20 minutes ago

asked 23 minutes ago

asked 24 minutes ago

asked 41 minutes ago

asked 41 minutes ago

asked 42 minutes ago

asked 48 minutes ago

asked 54 minutes ago

asked 59 minutes ago