In 2018, Algae Inc, a leading producer of industrial materials, was acquired by Refine, the then

competing producer in the world. The acquisition was conducted based on the consideration

that Algae was being poorly managed and that Refine would eliminate inefficiencies and

improve the performance of Algae. Algae's assets. In addition, Refine expected synergies, in

the form of both cost savings. Use the following data to value Algae and the control of Refine.

Algae had EBIT of $421.33million in 2017, which came from a pre-tax operating margin of

3.5% on revenues of $12,038 million and an after-tax return on capital of 7.32%; the firm had

a tax rate of 36%. Its' beta is 1.15, after-tax cost of borrowing is 5% and debt ratio is

approximately 15%. The risk-free at the time of the analysis was 5%.

1) Calculate Algae's cost of debt.

2) Calculate Algae's cost of equity.

Furthermore, Algae had capital expenditures of $365 million, depreciation of $352 million, and

working capital is 15% of revenues.

Operating income, net capital expenditures and revenues would grow 8% a year for the

next 5 years.

After year 5, operating income and revenues would grow 5% a year forever.

After year 5, capital expenditures will be 100% of depreciation and depreciation grows

at 5%.

The debt ratio remained at 15%, but the after-tax cost of debt dropped to 3% and the

beta dropped to 1.

3) What is Algae's new cost of equity after year 5

4) What is Algae's new cost of capital after year 5.

5) What is Algae's horizon (terminal) value?

6) What is the total value of Algae?

After the merger, Algae will raise its debt ratio to 20%.

7) What is Algae's unlevered beta?

8) What is Algae's new beta under the new debt ratio?

9) What is Algae's new cost of equity?

10) What is Algae's new cost of capital?