An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a

Question:

An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $100 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 $400 million financed with $350 million in debt to berepaid in five, equal, end-of-year payments and carrying an interest rate of 6 percent.

a. Calculate the annual debt-service payments required on the debt.

b. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service.

c. Assuming the company’s cost of capital is 10 percent, does the buyout look attractive? Why, or why not?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...

Fantastic news! We've Found the answer you've been seeking!