Bechannel Corporation for a year. She believes that the management at Bechannel has not been doing a good

job. Now Bechannel is financed entirely with equity. Becky thinks that Bechannel should focus on its core

business by selling gome divisions. However, the management does not seem to want any change. Becky

thinks that Bechannel is a good target for a leveraged buyout.

A leveraged buyout $($LBO$)$ is the acquisition by a small group of equity investors of a public or private

company. Generally, an LBO is financed primarily with debt. The new shareholders service the heavy

interest and principal payments with cash from operations and$/$or asget sales. Shareholders generally hope to

reverse the LBO within three to seven years by way of a public offering or sale of the company to another

firm. A buyout is therefore likely to be successful only if the firm generates enough cash to serve the debt in

the early years and if the company is attractive to other buyers a few years down the road.

Potential LBO partners have asked Becky to provide projections of the cash flows for Bechannel. Becky has

provided the following estimates $($in millions$)$ of cash flows $($assuming that, after LBO, the company can sell

some divisions to provide cash needed for NTVC and capital expenditure. So$,$ Becky and her partners do not

need to invest in NWC and capital expenditure after LBO$)$:

At the end of $2025,$ Becky eatimates that the growth rate in unlevered cash flows will be $3\mathrm{.}5\%$ a year. Becky

and her partners believe that in $2025$ they will be able to gell the company to another party or take it public

again. Becky thinks the company's debt$-$equity ratio should be at $1\mathrm{.}0$ in the long term after $2025.$ They are

also aware that they will be able to borrow $$9000$ million to pay part of the purchase price now $($the end of

$2020).$ Because of the high debt level, the debt will carry a yield to maturity of $10\mathrm{.}0\%$ for the next five years.

The cost of debt will drop to $7\mathrm{.}0\%$ after $2025.$

The company currently has a required return on assets of $16\mathrm{.}5\%($unlevered cost of capital$).$ The corporate

tax rate is $21\%.$ The company has currently $430$ million shares. If Becky and her partners decide to undertake

the LBO, what is the most they should offer per ghare?

Hints

You may need the following equations:

$FCF=$EBIT$(1-T)+DP-$net CAPx$\frac{-}{{?}_{\frac{?}{?}}}NWC$