Question
Limitas Inc. is a publicly traded chemical company with 200 million shares trading at $22 a share and $ 1.1 billion (market value) in outstanding
Limitas Inc. is a publicly traded chemical company with 200 million shares trading at $22 a share and $ 1.1 billion (market value) in outstanding debt; the market interest rate on the debt is 7.2%. The firms received a payment of $1.1 billion dollars in settlement of a patent suit from a competitor and decides to retire (pay down) all of its debt. You have the following information about the company: current equity (levered) beta is 1.65, risk free rate is 2.0%, market premium is 5.0%, tax rate is 38%; last year's free cash flow (to firm) was $210 million, which is expected to grow at a constant rate.
- Estimate the new value for the firm if it goes through with this transaction (10 points)
- What is the change in the value of a share (10 points)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To estimate the new value of the firm and the change in share value we need to calculate the firms weighted average cost of capital WACC before and af...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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