7. [20 marks] The Freebase Corporation is currently (1/1/2018) considering the acquisition of the stock of DeLorean Snowmobiles Inc. The financial statements for DeLorean for the year ending 12/31/201 7are: Income Statement Balance Sheet $200,000 Sales Current Assets Cost of goods sold (120,000) Property, Plant & Equipment Gross profit $80,000 Total Operating expenses (30,000) (8,000) Accruals & Payables Depreciation expense Long-term debt Earnings Before Interest and Taxes $42,000 Equity (25 000shares,$1 par Interest expense (1,000) value) Earnings before taxes $41,000 Total Taxes (40%) (16,400) Dividend Net income $24,600 $24,600 The estimated Beta for Delorean's stock is 1.2. The yields on 3-month and 20-year government securities are 8% and 10%. The expected market returns in excess of 3-month and 5-year government securities ar 6% and 8%. Delorean's stock is currently trading at $10/share. Questions a. What is the estimated cost of equity of Delorean Stock? b. What rate of growth does the market seem to be expecting for the dividends? c. Freebase believes that it can bring the COGS from 60% down to 55% and can in addition achieve a perpetual annual growth rate (using the growth rate in question b) on all other items on the balance sheet and Income Statement. Freebase believes that this performance can be achieved beginning in 2018. Assuming that the return on equity in (a) does not change with these revised expectations, what will DeLorean's equity be worth using FCFE? d. Freebase is contemplating the following takeover deal. First, a cash tender offer for 50% of DeLorean's shares at $12/share. For the remaining shares, Freebase plans to offer one share of newly issued preferred stock for each share of DeLorean. The preferred stock will have a par value of $14, a dividend of $1.80 and an estimated market value of $14. Is it a profitable acquisition from the viewpoint of Freebase's (common) shareholders? Justify your answer. 

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