Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:QUESTION 17
Berkshire Hathaway Inc. is considering a business expansion to the gambling industry by acquiring a casino which generates $20 million free cash flow per
year indefinitely.
The risk-free rate of return is 5% and the market risk premium, over and above the risk-free rate, is 10%.
Berkshire estimates that the beta of the casino is 1.2 and plans to maintain the debt-equity ratio of the casino to be one. Berkshire has recently issued bor
which pay an annual coupon of 4% and have a yield to maturity of 5%. Berkshire faces a 40% tax rate.
What is the maximum price Berkshire would pay for the casino in order for the acquisition to be acceptable?
a. $150.0 million
b.
$400.0 million
C. $117.6 million
d. $200.0 million
e. $181.8 million
O O O
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