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Columbia Home Care Inc. is considering a merger with HCA Home Care Inc. HCA is a publicly traded company, and its current beta is 1.30. HCA has been barely profitable and had paid an average of only 20 percent in taxes during the last several years. In addition, it uses little debt, having a debt ratio of just 25 percent. If the acquisition were made, Columbia would operate HCA as a separate, wholly owned subsidiary. Columbia would pay taxes on a consolidated basis, and the tax rate would therefore increase to 35 percent. Columbia also would increase the debt capitalization in the HCA subsidiary to 40 percent of assets, which would increase its beta to 1.50. Columbia estimates that HCA, if acquired, would produce the following net cash flows to Columbia's shareholders (in millions of dollars): Year Free Cash Flows to Equityholders 1 $1.30 2 $1.50 3 $1.75 4 $2.00 5 and beyond Constant growth at 6% These cash flows include all acquisition effects. Columbia's cost of equity is 14 percent, its beta is 1.0, and its cost of debt is 10 percent. The risk-free rate is 8 percent. a. What discount rate should be used to discount the estimated cash flow? (Hint: Use Columbia's cost of equity to determine the market risk premium.) b. What is the dollar value of HCA to Columbia's shareholders?
Objective type questions on investments and cost volume profit analysis and the fixed costs of the Maintenance Department are determined by the number of cases produced by the operating departments during the peak period
Explain who the counter-party is to a risk management derivatives contract that an insurance company would engage in and what his or her motives are to engage in the derivatives contract.
Assume you have $100,000 and want to invest money. How would you proceed to find a good company to put your money in?
Firm decides to recapitalize to take advantage of tax shield and firm's marginal tax rate is 40%. After a substantial borrowing, firm's cost of equity goes up to 10%.
There are times when the data can give you some inaccurate predictions. Personally, when I audit a firm, I typically use five years worth of information.
You invest $3,000 annually in a mutual fund that earns 10% annually, and you reinvest all the distributions. How much will you have in the account at the end of 20 years?
Your daughter is a starting freshman in high school. By the time she enters freshman year in college, you would wish to have savings accumulated to pay her tuition for her next 4-years of college.
Computation of capital generation at a sales level and How much capital will Longfellow generate by this sale
Suppose you have an investment opportunity in Japan. It requires an investment of $1 million today and will produce a cash flow of Y114 in one year with no risk. Assume risk free interest rate in the US is 4 percent.
The company's cost of equity is 15.5 percent while the aftertax cost of debt for the firm is 6.1 percent. What is the projected net present value of the new project?
Assume there is a 12- year, 9.5% semiannual coupon bond, with a par value of $1000. The bond sellsy for $1,152. A. What is the bond's yield to maturity. B. What is the bond's current yield?
Chicago Corporation purchases 1,000 shares of the preferred stock of Denver Corp. for $40 per share. In addition, Chicago pays another 1,000 in commissions.
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