At the end of five years, Meg estimates that the growth rate in cash flows will be $3\mathrm{.}5$ percent per

year. The capital expenditures are for new projects and the replacement of equipment that wears

out. Additionally, the company would realize cash flow from the sale of several divisions. Even

though the company will sell these divisions, overall sales should increase because of a more

concentrated effort on the remaining divisions.

After plowing through the company$$s financials and various pro forma scenarios, Ben and

Brenton feel that in five years they will be able to sell the company to another party or take it

public again. They are also aware that they will have to borrow a considerable amount of the

purchase price. The interest payments on the debt for each of the next five years if the LBO is

undertaken will be these $($in millions$)$:

$20152016201720182019$

Interest payments $$1,927$ $$1,859$ $$2,592$ $$2,526$ $$2,614$

The company currently has a required return on assets of $14$ percent. Because of the high debt

level, the debt will carry a yield to maturity of $12\mathrm{.}5$ percent for the next five years. When the debt

is refinanced in five years, they believe the new yield to maturity will be $8$ percent.

CPI currently has $425$ million shares of stock outstanding that sell for $$29$ per share. The

corporate tax rate is $40$ percent.

QUESTION:

If Meg, Ben, and Brenton decide to undertake the LBO, what is the most they should offer per

share?

Note: Just like in the RJR example from Appendix $18$A$,$ computing the value of the firm comes

down to getting the present value of its future cash flows, which can be broken conceptually into

four steps:

Step $1$: Calculating the present value of unlevered cash flows for the first five years.

Step $2$: Calculating the present value of the unlevered cash flows beyond the first five years.

Step $3$: Calculating the present value of interest tax shields for the first five years.

Step $4$: Calculating the present value of interest tax shields beyond the first five years.