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Columbia Home Care Inc. is considering a merger with HCA Home Care Inc. HCA is a publicly traded company, and its current beta is 1.30. HCA has been barely profitable and had paid an average of only 20 percent in taxes during the last several years. In addition, it uses little debt, having a debt ratio of just 25 percent. If the acquisition were made, Columbia would operate HCA as a separate, wholly owned subsidiary. Columbia would pay taxes on a consolidated basis, and the tax rate would therefore increase to 35 percent. Columbia also would increase the debt capitalization in the HCA subsidiary to 40 percent of assets, which would increase its beta to 1.50. Columbia estimates that HCA, if acquired, would produce the following net cash flows to Columbia's shareholders (in millions of dollars): Year Free Cash Flows to Equityholders 1 $1.30 2 $1.50 3 $1.75 4 $2.00 5 and beyond Constant growth at 6% These cash flows include all acquisition effects. Columbia's cost of equity is 14 percent, its beta is 1.0, and its cost of debt is 10 percent. The risk-free rate is 8 percent. a. What discount rate should be used to discount the estimated cash flow? (Hint: Use Columbia's cost of equity to determine the market risk premium.) b. What is the dollar value of HCA to Columbia's shareholders?
Assume that you buy a stock for $48 by paying $25 and borrowing the remaining $23 from a brokerage firm at 8 percent yearly interest. The stock pays an annual dividend of $0.80 per share,
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Rollins Company has a target capital structure consisting of 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Suppose the firm has insufficient retained earnings to fund the equity portion of its capital budget.
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company x is expected to pay an year-end dividend of $8 a share on its common stock. after the dividend payment the stock is expected to sell at $100 per share. the required rate of return on the common stock is 20%. then, calculate the current pr..
Trahan Lumber Company hired you to help estimate its cost of capital. You obtained the following data: D1 = $1.25; P0 = $15.00; g = 5.00% (constant); and F = 6.00%. What is the cost of equity raised by selling new common stock?
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Conduct Internet research on success rate of corporate combinations over the past 20 years. Describe your findings.
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