The unlevered cost of equity of Company WP.

Question

Melissa’s Kitchen is considering acquiring Takeshi’s Takeout Corp., a small local restaurant chain. Expected net cash flows from the acquisition for the first four years of the post-merger period are: Year 1 $350,000 Year 2 $400,000 Year 3 $475,000 Year 4 $550,000 After four years, the net cash flows are expected to grow at a constant rate of 3 percent per year. If we know the following information, what is the most Melissa’s Kitchen Should pay for Takeshi’s Takeout? Melissa’s Kitchen Borrowing costs 5% above the current long-term Treasury Bond rate 10-year T-Bond Rate 2/8/23 = 3.64% Beta 2.4 Debt $4 million Stock 500,000 shares outstanding - $20 per share on 2/8/23 Tax Rate 21 percent

Answer 1

Question

Chapter 22, Problem 7SP

a.

Summary Introduction

To compute: The unlevered cost of equity of Company WP.

b.

Summary Introduction

To determine: The horizon value of tax shields and unlevered operations of Company ACC. Also compute the value of Company ACC operations and it’s equity to Company WP shareholders.

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Melissa’s Kitchen is considering acquiring Takeshi’s Takeout Corp., a small local restaurant chain. Expected net cash flows from the acquisition for the first four years of the post-merger period are: Year 1 $350,000 Year 2 $400,000 Year 3 $475,000 Year 4 $550,000 After four years, the net cash flows are expected to grow at a constant rate of 3 percent per year. If we know the following information, what is the most Melissa’s Kitchen Should pay for Takeshi’s Takeout? Melissa’s Kitchen Borrowing costs 5% above the current long-term Treasury Bond rate 10-year T-Bond Rate 2/8/23 = 3.64% Beta 2.4 Debt $4 million Stock 500,000 shares outstanding - $20 per share on 2/8/23 Tax Rate 21 percent

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