This is a multiple question answer, so bear with me, and please answer all parts of the question if you want the points. The following info is needed to answer the question: Best Value Corporation is interested in acquiring Monopoly Corporation. Monopoly has 1 million shares outstanding and a target capital structure consisting of 30% debt. Monopoly's debt interest rate is 8%. Assume that the risk-free rate of interest is 5% and the market's risk premium is 6%. Both Monopoly and Best Value face a 40% tax rate.
Monopoly's free cash flow is $2 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.4.
What is the value of Monopoly's operations?
If Monopoly has $10.82 million in debt, what is the current value of Monopoly's stock?Best Value estimates that if it acquires Monopoly, interest payments will be $1,500,000 per year for 3 years, after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.472 million, after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million in Years 1 through 4 respectively, after which the free cash flows will grow at a 5% rate.
Best Value estimates that if it acquires Monopoly, interest payments will be $1,500,000 per year for 3 years, after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.472 million, after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million in Years 1 through 4 respectively, after which the free cash flows will grow at a 5% rate.
What is the unlevered value of Monopoly, and what is the value of its tax shields?
What is the per share value of Monopoly to Best Value Corporation? Assume that Monopoly now has $10.82 million in debt.
On the basis of your answers to the first two problems, indicate the range of possible prices that Best Value could bid for each share of Monopoly common stock in an acquisition.