Reference no: EM13335608
Assume the firm, called XYZ, is acquired for $220 (the price for the assets = new invested capital) by a private equity firm. The private equity firm issues substantial debt to buy the firm, which leads to a high cost of equity and debt; although, it hopes to improve the firm and earn a high ROE and return on capital to compensate for this added risk.
Values of firm XYZ before acquisition
$100 Sales
$18 EBIT (18% of sales)
$4 Interest (4% interest rate on debt)
$14 EBT
40% Tax rate
$8.4 Net income
$200 Assets = invested capital
$100 Debt
$100 Equity
8.40% ROE (net income / equity)
5.40% ROIC (NOPAT / invested capital)
8.00% Cost of equity
2.40% After-tax cost of debt
5.20% WACC (using book values)
0.20% EVA (i.e., ROIC - WACC)
To compute the new WACC:
The old equity is gone since the firm is purchased. To fund the purchase, the private equity firm assumes all existing $100 debt at the current 4% interest rate, borrows $100 in new debt with a 12% interest rate, and contributes $20 in equity. The cost of this contributed equity is 20%. The new firm has a 40% tax rate.
Additional information to compute the new ROE and ROIC:
Following the acquisition, EBIT rises from 20% of sales from 18% of sales and sales rise to $105 as the private equity firm improves operations, and the tax rate is unchanged.
1. What is the new ROE?
a) 8.70%
b) 12.00%
c) 14.00%
d) 15.00%
e) 44.70%
2. What is the new WACC?
a) 4.00%
b) 6.18%
c) 8.36%
d) 9.09%
e) 9.42%
3. If the private equity firm uses EVA (i.e., ROIC - WACC) as a criteria for determining whether to make acquisitions, should the private equity firm acquire XYZ firm?
a) Yes
b) No
c) Cannot be determined based on information provided
|
How would this technological change affect the price elastic
: Assume that, over time, engineers develop new residential furnaces that can run on different tpes of fuels, e.g., natural gas, electricity, propane, and fuel oil, simply by flipping a switch on the furnace.
|
|
Determine how much does tranche 2nd collect in principal
: Assume there are a bunch of mortgages that are supposed to pay principal payments and interest payments of $2100 during the year are pooled together and sold as securities.
|
|
Explain why the firm should shut down
: If the market price is below shut-down, regardless of fixed costs, explain why the firm should shut down.
|
|
What is the speed of a point on the rim
: A thin, 70.0g disk with a diameter of 7.50cm rotates about an axis through its center with 0.270J of kinetic energy
|
|
Explain why should the private equity firm acquire xyz firm
: To fund the purchase, the private equity firm assumes all existing $100 debt at the current 4% interest rate, borrows $100 in new debt with a 12% interest rate, and contributes $20 in equity.
|
|
Find the kinetic energy of the merry-go-round
: A horizontal 810-N merry-go-round of radius 1.30 m is started from rest by a constant horizontal force of 45 N applied tangentially to the merry-go-round
|
|
Determine what must the risk-free rate be on the market
: A stock has an expected return of 13.5 percent, its beta is 1.85, and the expected return on the market is 10 percent. What must the risk-free rate be
|
|
Calculate the npv in mexican pesos
: The projected cost of buying the equipment and shipping it is $3.7 million. Once the project begins operations, it is expected to last for 5 years (assume straight line depreciation).
|
|
Write a short report on a current game engine
: Briefly introduce and discuss a game engine of students own choice. Students are encouraged to explore the concept and discussion of existing technologies which define a game engine.
|