What is the maximum price per share the investment

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The following information is available about Russell Brewing Company. Stock price is $ 8 per share, common shares outstanding is 10 million, Market value of interest-bearing debt is 75 million, and weighted average cost of capital is 14 %.

A private-equity company is confident that by terminating Russell's money losing fruit-flavored beer coolers and by selling the women's hosiery division free cash flow can be increased $4 million annually for the next decade. In addition, they estimate that an immediate, special dividend of $10 million can be financed by the sale of the hosiery division.

QUESTION:

a. Assuming these actions do not affect Russell's cost of capital, what is the maximum price per share the investment company would be justified in bidding for control of Russell? What percentage premium does this represent?

b. Conduct a sensitivity analysis of your answer to (a) by assuming the cost of capital is 15 percent and the increased cash flow is only $3.5 million per year.

Reference no: EM13836204

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