Genesis Power is a listed power company. Genesis Power is the subject of a takeover offer by strategic competitor Lightning Co.

For Genesis Power, the forecast EBITDA next financial year (t+1) is $220 million and the expected depreciation expense is $70 million. Capital expenditure is forecast to be $80 million with no net working capital movements expected.

Genesis Power has 50 million shares outstanding trading at $40 per share and net debt of $1.0 billion.

UNSW Partners, the advisers to Lightning Co observe that the average equity (levered) beta for Genesis Power and a basket of comparable companies was 0.8, with an average D/E ratio of 50%. UNSW Partners advise that this comparables beta needs to be unlevered and re-levered for Lighting Co's long term optimal capital structure which comprises a target D/E of 66.67%. UNSW Partners observes that Lightning Co's pre-tax cost of debt is 6.0%. It also observes that the tax rate for both Lightning Co and Genesis Power is 30%, the long-term risk-free treasury bond yield is currently 3.5%, and the market risk premium is 6.0%.

Lightning Co believes that by sharing technologies and implementing a more successful growth strategy, it would collectively result in a free cash flow growth rate from year 1 and into perpetuity of 4.5%.

Lightning Co adopts these valuation parameters into its offer price.

a) Calculate the cost of equity that Lightning Co will adopt for its takeover of Genesis Power (1 mark)

b) What is the free cash forecast for Genesis Power next year FCF_t+1? (0.5 marks)

c) Utilising the formula EV = FCF_t+1 / (WACC g), and then deducting net debt from EV, calculate the offer price for Lightning Co's takeover bid. Calculate the takeover premium % for Lightning Co's takeover bid. (1.5 marks)