Reference no: EM133189735

Questions -

A. We want to compute the ROE of Chary. It has $20 m of book value of equity, and $80m of debt. Chary expects to sell $20m worth of sales and have EAT of $5m and keep 40% of its profit. Furthermore, it has $100m of assets. Its coe is .12 and its bheta is 1.2. Calculate Chary's ROE. Evaluate ROE as a performance measure.

B. Megas produces giros and stuffed grape leaves. It has the following capital structure. Its debt is $200m and its equity is $300M. Its risk free rate is 3%, while the expected return of the market is 10%, and its unlevered beta is 1. The corporate tax rate is .2, and the yield to maturity of its bonds is .05. Megas intends to invest $300 m into a giro (sharma) project wanting to become the biggest seller in the American continent. Thus, it expects to receive $75m operating free cash flow annually for 30 years on this investment. The depreciation is straight line for 30 years (based on the $300m investment) and the annual interest is $25 m.

For the grape leaves project, Megas will invest $210 million and receive $55m annually, in terms of operations free cash flow. Interest is $15 m and depreciation is $7 m per annum.

Compute the value of Megas.

C. There is a firm, which we are prospecting as a purchase candidate. It has the following features we find attractive. First, it will enable us to sell to the clients of this firm what we already are selling our existing clients. The revenue addition will be $12 million. However, it will induce $3million more expenses in attaining that higher level of revenue. Secondly, it will enable us to sell a division of the firm that does not really connect with our operations for $5 million. Thirdly, since there is a lot of repetition of positions (we are in the same line of business) we can lay off 50 employees permanently. The average salary of those employees is $60,000. The WACC of the firm is 10%. The coe is 16%. Calculate the amount that we can bid to acquire this company.