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Estimate waste business risk

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Suppose Wasteful, Inc. (NASDAQ Ticker: WASTE) is an inefficiently run company.  The buyout firm of XXX is considering an LBO of WASTE.  WASTE currently has 10,000,000 shares outstanding trading at $100/shr and no debt.  The Lean & Mean Corp (Ticker: LEAN) is half debt and half equity and is a competitor to WASTE.  LEAN has a cost of equity of 20% and a cost of debt of 8%.  The tax rate is 40%.

XXX has made the following projections for free cash flows (including from asset sales) and interest payments:

                              2022                2023               
FCFF                     250                  100
Interest                  100                  50

XXX assumes that CCFs (i.e., the sum of FCFF and tax shields) will grow at 4% after 2023. With this forecast, how would you characterise WASTE's terminal value (TV) as a multiple of Capital Cash Flows (CCFs) (under the LBO)?  XXX uses LEAN to estimate WASTE's business risk.

A. TV = 11.9 times terminal CCF

B. TV = 9.2 times terminal CCF

C. TV = 10.4 times terminal CCF

D. I do not wish to answer this questionI do not wish to answer this question

E. TV = 12.4 times terminal CCF

F. TV = 10.0 times terminal CCF

Reference no: EM133110889

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