For this and the next 7 questions. Kwang Min Chemicals (KMC) is a Korean based chemicals company currently considering the acquisition of a smaller chemicals firm, called Widler Paints (WP). The estimated post-merger cash flows (in millions) for WP are as follows:

Year

1

2

3

4

FCF

$5

$6

$8

$10

Interest expenses

$2

$2

$4

$4

Unlevered horizon value (UHV₄)

$200

Horizon value interest tax savings (HVITS₄)

$40

Widler Paints (WP) is currently financed with 60% debt at an interest rate of 12%. Additional financial data for WP are as follows: Total debt outstanding is currently $20 million, pre-merger beta (BL) is 2, and post-merger tax rate will be 20%. Assume the risk-free interest rate is 8%, and market risk premium (i.e. market return minus riskfree interest rate) is 5%. Using the CAPM, calculate WP's cost of levered equity; i.e. calculate rEL.

1. 16%
2. 14.2%
3. 18%
4. 14.4%
5. None of the above

1 points

QUESTION 2

1. Calculate the target firm's cost of unlevered equity (that is rEU).
2. 16%
3. 14.2%
4. 18%
5. 14.4%
6. None of the above

1 points

QUESTION 3

1. Calculate the target firm's unlevered beta (BU) using the Hamada formula.
2. 0.91
3. 2.91
4. 1.59
5. 2.20
6. None of the above

1 points

QUESTION 4

1. Calculate the present value of the unlevered firm for the target firm. For this problem, do NOT use your calculated cost of unlevered equity. Instead, please use rEU of 15%. Again, do NOT use the cost of unlevered equity you calculated earlier.
2. $76.474 million
3. $134.213 million
4. $128.495 million
5. $24.730 million
6. $14.058 million
7. $158.943 million
8. None of the above

1 points

QUESTION 5

1. Calculate the present value of interest tax savings for the target firm. Again, for this problem, use cost of unlevered equity (rEU) of 15%. Do not use the cost of unlevered equity you calculated earlier.
2. $76.474 million
3. $134.213 million
4. $128.495 million
5. $24.730 million
6. $14.058 million
7. $158.943 million
8. None of the above

1 points

QUESTION 6

1. Using the APV method, calculate the target firm's value of operations (VOP) today.
2. $76.474 million
3. $134.213 million
4. $128.495 million
5. $24.730 million
6. $14.058 million
7. $158.943 million
8. None of the above

1 points

QUESTION 7

1. What is the value of the target company's equity. Recall that debt level is $20 million.
2. $76.474 million
3. $134.213 million
4. $128.495 million
5. $24.730 million
6. $14.058 million
7. $158.943 million
8. None of the above

1 points

QUESTION 8

1. Calculate the target firm's intrinsic stock price if the number of shares is 30 million.
2. About $4.63
3. About $3.43
4. About $3.25
5. About $1.76
6. None of the above