*Please show excel formulas utilized and or work* Question 3. (15 points) Mantra

Question

*Please show excel formulas utilized and or work*

Question 3. (15 points) Mantra Corporation is interested in acquiring Corlos Corporation.   Corlos has 20 million shares outstanding and a target capital structure consisting of 40 percent debt and 60 percent equity. The debt interest rate is 9%. Assume that the risk-free rate of interest is 2% and the market risk premium is 10%.

Corlos' free cash flow (FCF0) is $10 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.2. Corlos has $8 million in debt.   The tax rate for both companies is 35%.

a.      Calculate the required rate of return on equity using equation: rs= rRF + RPM

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

c.      Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g)

d.      Calculate the value of the company's equity, using equation: Vs = Vops - debt

e. Calculate the current value of the company's stock.

Explanation / Answer

Debt=40% , Equity=60%

a) Cost of debt =9% , Cost of Equity = Rf + Beta *(Rm-Rf) = 2+ 1.2*(10) = 14%

b) WACC = Wd*Cost of debt*(1-t) + We*Cost of Equity = 0.4*9*(1-0.35) +0.6*14 = 10.74%

c) Vops = FCFO*(1+g)/(k-g) = 10*(1+0.05)/(0.1074-0.05).... (k-->WACC)

Vops = 10.5/(0.0574) = 182.92mn

d) Vs = Vops-Debt = 182.93 - 8 = 174.93mn

e) Equity Value = Price per share * No. of shares outstanding

Price per share = 174.93/20 = $8.75

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