Reference no: EM132157798
Chittenden is considering the acquisition of another firm in its industry. The acquisition is expected to increase Chittenden's free cash flow by $5 million the first year and this contribution is expected to grow at a rate of 4% per year from then on. Chittenden has negotiated a purchase price of $110 million. Chittenden has an equity cost of capital of 12.3%, a debt cost of capital of 8.5%, a tax rate of 40%, and continually adjusts its capital structure to maintain its current debt-to-equity ratio of 2.
How much of the acquisition cost must be financed with equity?
The remaining cost = $110,000,000 - $95,238,095.24=$14,761,904.76 will be financed by new equity issuance.
Why the equity is not $142,857,142.90* 2/3 but $110,000,000 - $95,238,095.24=$14,761,904.76 ?
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