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Determine company rate of return after the takeover

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Reference no: EM132771828

The two parts of this question all refer to the same information as follows. Ariella owns a company in The Bahamas which pays no tax. It has a value of $15 million and it is returning 18% per annum. She owns it outright (no debt). Ariella agrees to sell the firm to Charlie for $15 million. Charlie will fund two thirds of this from his own cash and borrow one third using a bank loan which pays interest at 5% per annum. The takeover does not change the risk characteristics of the business.

Problem 1: Determine:

(a) The company's rate of return after the takeover

(b) The rate of return that Charlie should receive on his investment.

Reference no: EM132771828

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