) Mantra Corporation is interested in acquiring Corlos Corporation. Corlos has 1

Question

) Mantra Corporation is interested in acquiring Corlos Corporation.   Corlos has 10 million shares outstanding and a target capital structure consisting of 30 percent debt and 70 percent equity. The debt interest rate is 8%. Assume that the risk-free rate of interest is 3% and the market risk premium is 7%.

Corlos' free cash flow (FCF0) is $5 million per year and is expected to grow at a constant rate of 6 percent a year; its beta is 1.2. Corlos has $5 million in debt.   The tax rate for both companies is 30%.

shares outstanding    10,000,000     FCF0      5,000,000

target debt in capital structure    30%              constant growth rate 6%

Debt interest rate                            8%                 Beta 1.2

rRF                                                   3%                  Amount of debt 5,000,000

market risk premium                     7%

tax rate                                             30%

Explanation / Answer

a. Calculate the required rate of return on equity using equation:

r s= rRF + RPM(b)

rRF=3%

rRF 3%

market risk premium                     7%

Beta 1.2

= r s= rRF + RPM(b)=11.40% answer

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b. Calculate weighted average cost of capital, using equation: WACC = W drd(1-%) + wsrs

Target debt in capital structure

So Target Stocks in capital structure

Tax rate-------30%

WACC

Debt interest rate
70%

Required Rate of Return on equity

1-Tax Rate=70.00%

8%
11.40%
70.00%

9.66%----------------answer
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c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g)
FCF0
Constant growth rate(g)
WACC
Vops

5,000,000
6%
9.66%

$144,808 ,743.17
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d. Calculate the value of the company's equity, using equation:

Vs = Vops - debt  

Vops $144,808,743.17

Amount of debt $5,000,000.00

Value of Company's Equity $139,808,743.17


====================================
e. Calculate the current value of the company's stock.
Value of Company's Equity $139,808,743.17
Shares outstanding 10,000,000
current value of the company's stock. $13.98

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