Estimate the targets all-equity present value

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Problem

A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. Year ($ millions) 1 2 3 4 5 Free cash flows $ 45 $ 60 $ 65 $ 70 $ 70 Selling price $ 840 Total free cash flows $ 45 $ 60 $ 65 $ 70 $ 910 To finance the purchase, the investors have negotiated a $600 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk premium 5 percent. Get the instant assignment help. Estimate the target's all-equity present value.

Reference no: EM133911469

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