a)
To determine: The value of unlevered operations and tax shield.
a)
Explanation of Solution
The computation of unlevered
Hence, the value of unlevered operation is 11.14%.
The computation of tax rate is as follows:
In the other years, the tax shield is equivalent to the interest cost multiplied by the rate of tax:
TS1 = 1.2(0.35) = 0.42, TS2 = 0.595, TS3 = 0.98, TS4 = 0.735
Hence, the value of tax shield is $11.50million.
The computation of unlevered horizon value is as follows:
Hence, the unlevered horizon value is $43.7million.
The computation of unlevered value of operation is as follows:
Hence, the unlevered value of operation is $32.02million.
b)
To determine: The dollar value of company C’s operations and how much the company M ready to pay for company C.
b)
Explanation of Solution
The computation of dollar value of operation is as follows:
Hence, the dollar value of operation is $43.52million.
The computation of amount ready to pay for company C is as follows:
Hence, the amount pay for company C is 33.52million.
Although not requisite for the value computation, the WACC at the new capital structure can be computed. At the new capital structure of 40 percent debt with a rate of 9.5 percent, the new levered cost of equity and WACC will be:
Hence the WACC is 9.81%.
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Chapter 26 Solutions
Intermediate Financial Management (MindTap Course List)
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- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning