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Maximum debttronics can pay for chalktronics

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Reference no: EM131757868

Assume Chalktronics is for sale for $500,000 and the firm has the following characteristics:

Cash sales: $600,000 per year forever

Cash costs: 70% of sales

Corporate tax rate: 40%

Unlevered cost of capital (r0): 20%

Both Pentronics and DebtTronics are interested in purchasing Chalktronics.

Pentronics will use no debt financing and DebtTronics will use a target D/E ratio of 10% to finance the acquisition.

A. What is the maximum Pentronics can pay for Chalktronics?

B. What is the maximum DebtTronics can pay for Chalktronics?

Reference no: EM131757868

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