Calculate the horizon value of the target

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Reference no: EM132014152

Suppose we are planning to buy a company with the following forecasts:

Year	1	2	3 & afterwards
FCF	$5 million	$ 5.5 million	3% constant growth rate
Debt level	$50 million	$35 million	Constant debt to equity ratio. Capital will be 50% debt and 50% equity, w_d = w_s= 0.5.

The cost of debt is 5%

The cost of equity is 20%

The tax rate is 40%

The company has 15 million shares outstanding

The current stock price is $2.05

The company is currently holding no financial assets.

The company has $3,000,000 in debt.

WACC, the cost of capital, is equal to 11.5%

RSU, the cost of unlevered equity, is equal to 12.5%

Question 1- Calculate the value of the debt tax shield.

Question 2 Calculate the horizon value of the target.

Question 3 -Calculate the value of operations.

Question 4 What is the highest offer price we can make? Is the acquisition feasible?

Question 5 - Why do the target's free cash flows vary from one acquirer to another?

Question 6 -What are the main disadvantages of the payback method for evaluating projects?

Reference no: EM132014152

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