Question: A company financed with 100% equity has a cost of capital equal to approximately 10%. This firm has only one asset: a chemical plant capable of generating $100 million per year in FCF (free cash flow) every year for five subsequent years, at which time the facility will be abandoned. A buyout firm offers to buy the company for $400 million financed with $350 million in debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 6%.

First, calculate the annual debt-service payments required on the debt. Now, ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt-service.

Finally, assuming the company's cost of capital is 10%, does the buyout look attractive? Please explain.