# Free cash flow, value of operations, share value, bid price

Hast is interested in acquiring Van. Van has 1 million shares outstanding and a target capital structure consisting of 30% debt. Van's debt interest is 8%. Assume that the risk-free rate of interest is 5% and the market risk premium is 6%. Both Hast and Van face a 40% tax rate.

Could you show me step by step showing all calculation in black font with my attached Excel spreadsheet?

1. Van's free cash flow (FCF o) is $ 2 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.4.

What is the value of Van's operations?

If Van has $10.82 million in debt, what is the current value of Van's stock? (Use the corporation valuation model)

2. Hast estimates that if it acquires Van, interest payments will be $1,500,000 per year for 3 years, after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.472 million, after which interest and the tax shield will grow at 5%.

Synergies will cause the free cash flows to be $2.5 million,

$2.9 million, $3.4 million, and then $3.57 million, in Years 1 through 4, after which the free cash flows will grow at a 5% rate.

What is the unlevered value of Van and what is the value of its tax shields?

What is the per share value of Van and Hast Corporation? Assume Van now has $10.82 million in debt.

3. On the basis of the data answers for the above 1 and 2, if Hast were to acquire Van, what would be the range of possible prices that it could bid for each share of Van common stock?

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#### Solution Summary

The solution explains the calculation of free cash flow, value of operations, per share value and bid price relating to the acquisition of Van by Hast

a. Calculate Bear's times-interest earned ratio for next year assuming the firm raises $60 Million of new debt at an

interest rate of 9 percent.

b. Calculate Bears times-burden covered ratio for the next year assuming annual sinking-fund payments on the new

debt will equal $5 Million

c. Calculate next years earnings per share assuming Bear raises the $60 Million of new debt.

d. Calculate next years times-interest earned ratio, times-burden-covered ratio, and earnings per share if Bear sells

$2 Million new shares at $17.00 per share instead of raising new debt.

a. Find the investment's accounting rate of return and its payback period.

b. Find the investment's net present value at 20 percent discount rate.

c. Find the investment's profitability index at a 20 percent discount rate.

d. Find the investment's internal rate of return.

a. Calculate the Net Present Value of each alternative

b. Calculate the internal rate of return for each alternative.

d. If the company is not under capital rationing, which alternative should be chosen? Why?

1

ABC Waterhouse's free cash flow next year will be $250 million and it is widely expected to grow at a 5 percent annual rate indefinitely.

The company's weighted average cost of capital is 11 percent, the market value of its liabilities is $2.5 billion, and it has 32 million shares outstanding.

a. Estimate the price per share of ABC's common stock.

b. A private equity firm believes that by selling the company 200 water towers, increasing the work day to eight hours, and instituting other cost savings, it can increase ABC's free cash flow next year to $260 billion and can add a full percentage point to ABC's growth rate without affecting its cost of capital. What is the maximum price per share the private equity firm can justify bidding for control of ABC?

2

As the Financial vice president for Bear Enterprises, you have the following information:

Expected net income after tax next year before new financing $60,000,000

Sinking Fund payments due next year on existing debt 20,000,000

Interest due next year on existing debt 18,000,000

Conpany Tax rate 25%

Common Stock Price, per share 17

Common Shares outstanding 22,000,000

a. Calculate Bear's times-interest earned ratio for next year assuming the firm raises $60 Million of new debt at an

interest rate of 9 percent.

b. Calculate Bears times-burden covered ratio for the next year assuming annual sinking-fund payments on the new

debt will equal $5 Million

c. Calculate next years earnings per share assuming Bear raises the $60 Million of new debt.

d. Calculate next years times-interest earned ratio, times-burden-covered ratio, and earnings per share if Bear sells

$2 Million new shares at $17.00 per share instead of raising new debt.

3

yyep

An investment costing $70,000 promises an after tax cash flow of $28,000 per year for 7 years.

a. Find the investment's accounting rate of return and its payback period.

b. Find the investment's net present value at 20 percent discount rate.

c. Find the investment's profitability index at a 20 percent discount rate.

d. Find the investment's internal rate of return.

4

A Company is considering two alternative methods of producing a new product. The relevant data concerning the

alterrnatives are presented below.

Alternative Alternative

I II

Initial Investment 50,000 110,000

Annual receipts 36,000 50,000

Annual disbursements 16,000 10,000

Annual depreciation 12,000 16,000

Expected Life 5 years 7 years

Salvage Value 0 0

At the end of the useful life of whatever equipment is chosen the product will be discontinued. The company's tax

rate is 50 percent, and its cost of capital is 11 percent.

a. Calculate the Net Present Value of each alternative

b. Calculate the internal rate of return for each alternative.

d. If the company is not under capital rationing, which alternative should be chosen? Why?

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