PECO just acquired TargetCo for $90M. The transaction is financed with $60M of outside debt and...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
PECO just acquired TargetCo for $90M. The transaction is financed with $60M of outside debt and the rest with PECO's capital. Cost of debt is 5%. PECO plans to pay down debt aggressively over the next 4 years using TargetCo's cash flows and then exit at the end of year 4 via an equity sale. After year 4, debt is assumed to remain at the same level forever. TargetCo's EBIT and debt for the next 4 years are shown in the table below. Annual capex is assumed to be the same as the depreciation expense. There is no incremental NWC investment going forward. TargetCo's unlevered cost of capital is 10%. Tax rate 30%. Long-term growth g = 0 after year 4. If PECO can exit at the end of year 4 (after debt pay down) based on an EV/NOPAT(Y4) multiple of 12, what would be PECO's IRR for this buyout deal? Assume TargetCo has little cash on the balance sheet at the end of year 4, and PECO will not receive any dividend distribution from TargetCo in years 1-4. Year EBIT Debt: end of year (after debt pay down) 60.00 10 55.10 11 49.33 3 12 42.65 13 35.05 PECO just acquired TargetCo for $90M. The transaction is financed with $60M of outside debt and the rest with PECO's capital. Cost of debt is 5%. PECO plans to pay down debt aggressively over the next 4 years using TargetCo's cash flows and then exit at the end of year 4 via an equity sale. After year 4, debt is assumed to remain at the same level forever. TargetCo's EBIT and debt for the next 4 years are shown in the table below. Annual capex is assumed to be the same as the depreciation expense. There is no incremental NWC investment going forward. TargetCo's unlevered cost of capital is 10%. Tax rate 30%. Long-term growth g = 0 after year 4. If PECO can exit at the end of year 4 (after debt pay down) based on an EV/NOPAT(Y4) multiple of 12, what would be PECO's IRR for this buyout deal? Assume TargetCo has little cash on the balance sheet at the end of year 4, and PECO will not receive any dividend distribution from TargetCo in years 1-4. Year EBIT Debt: end of year (after debt pay down) 60.00 10 55.10 11 49.33 3 12 42.65 13 35.05
Expert Answer:
Answer rating: 100% (QA)
Here are the stepbystep calculations 1 Calculate TargetCos NOPAT each year Year 1 EBIT 10 NOPAT EBIT ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
How do recruitment and selection practices contribute to high performance in an organization?
-
Determine the moment of inertia of the cross-sectional area about the xaxis. 10 mm 180 mm 100 mm 10 mm -100 mm- 10 mm
-
Suppose the San Francisco 49ers is a price discriminating monopolist which has fixed costs of 10,000 (there are no variable costs). The market for basketball tickets is divided into students and...
-
Consider the equity prices of the United States companies Microsoft and Walmart for the period April 1990 to July 2004 ( \(T=172)\). (a) Compute the continuously compounded (log) returns on Microsoft...
-
The condensed income statement for the Consumer Products Division of Milner Industries Inc. is as follows (assuming no service department charges): Sales ...............$ 7,000,000 Cost of goods sold...
-
What role can technology play in conflict resolution, and what are the most promising technological innovations that can enhance or streamline the conflict resolution process?
-
Alex was in his friend Allison's home drinking straight vodka and doing drugs. Alex told Allison that he has not taken his prescribed mental health medications for two weeks. This did not concern...
-
What measures do you take to protect your data and devices from cyber criminals? What are the implications of computer hacking for governments and businesses?
-
A company has financed 45% of its assets through a 11% after-tax cost of debt loan. The remainder of its assets are financed through equity. The firm's required return on equity is 16%. Calculate the...
-
The Company recognizes revenue on the percentage completion method of accounting and in accordance with ASC 606. A summary of the Company's work-in-process detail, as of December 31, 2022, is as...
-
Zee-Drive Ltd. is a computer manufacturer. One of the items they make is monitors. Zee-Drive has the opportunity to purchase 18,000 monitors from an outside supplier for $215 per unit. One of the...
-
On June 3, Sophie Company sold merchandise worth $800 on credit, terms 2/10, n/30. The merchandise sold had cost $550. The customer paid the amount on June 15. What is the required Debit entry to...
-
A jewelry firm buys semiprecious stones to make bracelets and rings. The supplier quotes a price of $8.10 per stone for quantities of 600 stones or more, $8.50 per stone for orders of 400 to 599...
-
A five-cylinder in-line with successive cranks spaced 144 degrees apart and cylinder centre lines 400 mm apart operates at 900 revolutions per minute. The connecting rod to crank ratio is 6 and the...
-
You are maintaining a subsidiary ledger account for Police-Training Expenditures for 2013. The following columns are used: Inventory purchases are initially recorded as expenditures. Record the...
-
Option values are extinguished when they are exercised. How does this influence capital budgeting decisions? What considerations, or types of analysis, might lead management to take the plunge and...
-
Calculate Computrons return on invested capital. Computron has a 10% cost of capital (WACC). Do you think Computrons growth added value? Donna Jamison, a graduate of The University of Tennessee with...
-
(1) Harry Davis estimates that if it issues new common stock , the flotation cost will be 15%. Harry Davis incorporates the flotation costs into the DCF approach. What is the estimated cost of newly...
-
An instrument has a failure rate of 0.015 failures per year. All failures are immediately detectable. The MTTR is 24 hours. What is steady state unavailability?
-
Each of the 50 transmitters in identical service had a test time of 7,640 hours. During this period, three failures occurred. Calculate the failure rate.
-
A valve has a failure rate of 0.06 failures per year. A periodic inspection performed once a year can detect 60% of the failures. The valve is operated for 10 years before it is removed from service...
Study smarter with the SolutionInn App