Mantra corporation is interested in acquiring corlos, Ask an Expert

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Mantra Corporation is interested in acquiring Corlos Corporation. Corlos has 20 million shares outstanding and a target capital structure consisting of 40 percent debt and 60 percent equity. The debt interest rate is 9%. Assume that the risk-free rate of interest is 2% and the market risk premium is 10%.

Corlos' free cash flow (FCF0) is $10 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.2. Corlos has $8 million in debt. The tax rate for both companies is 35%.

a. Calculate the required rate of return on equity using equation: rs= rRF + RPM

b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs

c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g)

d. Calculate the value of the company's equity, using equation: Vs = Vops - debt

e. Calculate the current value of the company's stock.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92777780

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