Purchase Solution

Rate of Return on equity

Not what you're looking for?

Ask Custom Question

Reuth Corporation is interested in acquiring Hyatt Corporation. Hyatt has 5 million shares outstanding and a target capital structure consisting of 35 percent debt. Reuth's debt interest rate is 10 percent. Assume that the risk-free rate of interest is 2 percent and the market risk premium is 8 percent.

Hyatt's free cash flow (FCF0) is $5 million per year and is expected to grow at a constant rate of 5 percent a year; its beta is .9. Hyatt has $10 million in debt. The tax rate for both companies is 30 percent.

a. Calculate the required rate of return on equity using equation: rs= KRF + RPM(b)
b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs
c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g)
d. Calculate the value of the company's equity, using equation: Vs = Vops - debt
e. Calculate the current value of the company's stock, using equation:
Price per share = Vs/shares outstanding

Attachments
Purchase this Solution
Solution Summary

Calculates required rate of return on equity, weighted average cost of capital, value of operations, value of the company's equity, value of the company's stock.

Purchase this Solution
Free BrainMass Quizzes
Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

View More Free Quizzes
Related BrainMass Solutions

  • Calculating WACE

    First, we need to find the required rate of return on equity using the Gordon Dividend Growth Model.

  • Global Financial Management

    The internal rate of return on the investment or project is the rate of return that makes the net present value from a particular investment equal zero.

  • Rate of return on stock holders' equity and return on assets

    69484 Rate of Return on Stock Holders' Equity and Return on Assets Why should a healthy company's rate of return on stock holders' equity exceed its rate of return on total assets?

  • Zero growth valuation models

    What is the required rate of return on the firm's equity? 2. Sampson Corporation's ernings are expected to be $5.00 per share and its required rate of return on equity is 22%. What is the current price of the stock? 3.

  • Calculate the Sustainable Growth Rate

    The sustainable growth rate=return on equity*(1-dividend payout ratio). Likewise, return on equity=(net income/total assets)*(total assets/stockholder's equity), or return on assets*equity multiplier.

  • Rate of return, growth rate, return on equity

    Rate of return __________ % Sustainable growth rate = Return on equity*Plowback rate .07 = Return on equity * .50 .14 = Return on equity Rate of return = 14 percent This solution illustrates how to compute a stock's rate of return, growth rate

  • WACC and expected return on equity

    Now as we know that, WACC=W_d R_d+W_e R_e Where, Wd=Weight of debt Rd=Cost of debt=required rate of return on debt We=Weight of equity Re=Cost of equity=Required rate of return on equity So, 12%=38.46%*9%+61.45%*R_e Or, R_e=(12%-(38.46%*9%))

  • You know that when expanding and investing in projects

    409591 Return on Equity (ROE) and Internal Rate of Return (IRR) You know that when expanding and investing in projects overseas as Acme plans to, it is essential to understand such things as return on equity (ROE) and internal rate of return (IRR).

  • Calculating Rate of Return on Equity

    D0=$1.6 g=2% P0=$12.5 r=required return on equity r=D0*(1+g)/P0+g=1.6*(1+2%)/12.5+2%=0.15056 or 15.056% Answer = required rate of return on equity = 15.056% Shows how to calculate the required rate of return on equity using dividend discount method

  • Equity beta and rate of return

    According to the Capital Asset Pricing Model: rS = rf + βEquity(rm - rf) where rS = the required rate of return on a firm's equity rf = the risk-free rate rm = the expected return on the market portfolio βEquity = the equity

View More Related Solutions