Calculate the value of the target firms equity

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Reference no: EM13947194

1. Teddy Corp is considering acquiring Daniels Company. Daniels has a capital structure consisting of $5 million (market value) in 11% bonds and $10 million (market value) of common stock. Currently, Daniels has a beta of 1.36. Teddy's beta is 1.02. Both firms have tax a rate of 40%. Teddy's debt ratio is 40%. The free cash flows estimated for Daniels are $3 million for each of the next 4 years and a horizon value of $10 million in Year 4. Interest tax savings are estimated to be $1 million for each of the next 4 years and a horizon value of $5 million in Year 4. Additionally, new debt would be issued to finance the acquisition. The new debt would have an interest rate of 8%. Currently, the risk-free rate is 6% and the market risk premium is 4%. Calculate the current WACC for the Daniels Company.

a. 8.06%

b. 9.83%

c. 11.29%

d. 11.44%

e. 13.49%

2. Calculate the target firm's (Daniels) cost of equity using the CAPM.

a. 10.08%

b. 11.01%

c. 11.44%

3. Calculate the target firm's cost of Unlevered equity using the following formula wDrD + wErEL.

a. 9.83%

b. 10.06%

c. 11.29%

d. 11.44%

e. 13.49%

4. Calculate the value of the target firm's equity? There are no non-operating assets to consider.

a. $17.11 m

b. $17.19 m

c. $17.92 m

d. $22.11 m

e. $22.92 m

Reference no: EM13947194

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