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FMC Corporation, an American chemical manufacturing company headquartered in Philadelphia, Pennsylvania is considering acquisition of Cheminova, a European crop protection player. FMC is a public company and Cheminova is a private company. Cheminova is financed with 50% debt (that is, 50% of firm value is in debt and 50% in equity). Yield to maturity on its outstanding debt is 4%. Annual before-tax before-interest operating cash flows for the year just ended were $6 million. The corporate tax rate was 40 percent for both FMC and Cheminova. Assume perpetual operating cashflows for Cheminova's future cashflows. FMC has return on equity of 11.05%, debt-to-equity ratio of 25%, and yield to maturity of 3% on its outstanding debt. Assume also that the probability of bankruptcy is minimal so that costs associated with potential bankruptcy can be ignored.
a) What is the maximum acquisition price that FMC can pay for acquiring Cheminova's all assets assuming that both FMC and Cheminova are subject to similar business risks?
b) Compute weighted average cost of capital for Cheminova.
c) FMC has access to cheaper debt (at 3%) than Cheminova (at 4%) and FMC plans to fund half the acquisition with debt. How much should FMC be willing to pay for Cheminova? Justify your answer.
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