Suppose company Alpha is considering a takeover of company Beta that is deeply burdened with debt and is on the verge of bankruptcy. 

Alpha generates perpetual free cash flow of £10M per year and the required return on equity is 5%. 

In addition to the free cash flow, Alpha has £50M cash inside the company. Alpha is all equity financed, with 10M shares.  Beta has 90% market leverage ratio and 1M shares currently traded at £15 per share. The takeover will improve the value of Beta's assets by 10%. Assume that shareholders of Alpha and Beta will equally share the gain in this takeover. 

What is the market value of Beta's assets without a takeover?

 What is the price that Alpha pays for Beta's total equity? 

Answer rating: 100% (QA)

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