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Howell Corporation is interested in acquiring Burns Industries. Burns has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Burns has $8.33 million in debt that trades at par and pays a 7% interest rate. Burns’ free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Burns pays a 25% combined federal-plus-state tax rate, the same rate paid by Howell. The risk-free rate of interest is 6%, and the market risk premium is 7%. Hasting’s first step is to estimate the current intrinsic value of Burns. A. What is Burns’ cost of equity? Do not round intermediate calculations. Round to two decimal places. _______% B. What is its weighted average cost of capital? Do not round intermediate calculations. Round to two decimal places.  ________% C. What is Burns’ intrinsic value of operations? Do not round intermediate calculations. Round to two decimal places. $______million D.Based on this analysis, what is the minimum stock price that Burns’ shareholders should accept? Do not round intermediate calculations. Round to the nearest cent (two decimal places). $_______

Howell Corporation is interested in acquiring Burns Industries. Burns has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Burns has $8.33 million in debt that trades at par and pays a 7% interest rate. Burns’ free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Burns pays a 25% combined federal-plus-state tax rate, the same rate paid by Howell. The risk-free rate of interest is 6%, and the market risk premium is 7%. Hasting’s first step is to estimate the current intrinsic value of Burns. A. What is Burns’ cost of equity? Do not round intermediate calculations. Round to two decimal places. _______% B. What is its weighted average cost of capital? Do not round intermediate calculations. Round to two decimal places.  ________% C. What is Burns’ intrinsic value of operations? Do not round intermediate calculations. Round to two decimal places. $______million D.Based on this analysis, what is the minimum stock price that Burns’ shareholders should accept? Do not round intermediate calculations. Round to the nearest cent (two decimal places). $_______

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 17P
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Howell Corporation is interested in acquiring Burns Industries. Burns has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Burns has $8.33 million in debt that trades at par and pays a 7% interest rate. Burns’ free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Burns pays a 25% combined federal-plus-state tax rate, the same rate paid by Howell. The risk-free rate of interest is 6%, and the market risk premium is 7%. Hasting’s first step is to estimate the current intrinsic value of Burns.

A. What is Burns’ cost of equity? Do not round intermediate calculations. Round to two decimal places. _______%

B. What is its weighted average cost of capital? Do not round intermediate calculations. Round to two decimal places.  ________%

C. What is Burns’ intrinsic value of operations? Do not round intermediate calculations. Round to two decimal places. $______million

D.Based on this analysis, what is the minimum stock price that Burns’ shareholders should accept? Do not round intermediate calculations. Round to the nearest cent (two decimal places). $_______

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