A consortium led by Sony Corporation of America, Comcast Corporation and the private equity partners including Providence Equity Partners, Texas Pacific Group, and DLJ Merchant Banking Partners is planning to acquire Metro- Goldwyn-Mayer Inc. (MGM). The investor group has committed a total of $1.6 billion in equity financing, while JP Morgan Chase has committed to lead a bank syndicate to provide up to $4.25 billion in senior debt financing together with Credit Suisse First Boston.

1. The consortium is valuing MGM by using the Cost of Capital method with the assumptions as below. It is estimated that the applicable unlevered beta should be 2.5 while the risk-free rate and market risk premium are 4.0% and 5.0% respectively. Beyond 2019, the cash flow is expected to continue as a perpetuity with a reduced cost of equity at 10.0%. The marginal tax rate is 35.0% and all cash flows are realised at the end of each year.

	2016	2017	2018	2019
FCFE	$100mil	$120mil	$144mil	$172mil
Target D/E	1.5	0.45	0.14	0.04

What is the present value of MGM equity as in 2015? Show your work.

Answer is = 314.0 + 803.7 = 1,117.7