An all - equity financed company has a cost of capital of 1 0 percent. It owns
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Question:
An allequity financed company has a cost of capital of percent. It owns one asset: a mine capable of generating $ million in free cash flow every year for five years, at which time it will be abandoned. A buyout firm proposes to purchase the company for $ million financed with $ million in compound interest debt to be repaid in five, equal, endofyear payments and carrying an interest rate of percent.
a Calculate the annual debtservice payments required on the debt.
b Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service.
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