) Mantra Corporation is interested in acquiring Corlos Corporation. Corlos has 10 million shares outstanding and a target capital structure consisting of 30 percent debt and 70 percent equity. The debt interest rate is 8%. Assume that the risk-free rate of interest is 3% and the market risk premium is 7%.

Corlos' free cash flow (FCF0) is $5 million per year and is expected to grow at a constant rate of 6 percent a year; its beta is 1.2. Corlos has $5 million in debt. The tax rate for both companies is 30%.

shares outstanding 10,000,000 FCF0 5,000,000

target debt in capital structure 30% constant growth rate 6%

Debt interest rate 8% Beta 1.2

rRF 3% Amount of debt 5,000,000

market risk premium 7%

tax rate 30%

a. Calculate the required rate of return on equity using equation: r_s= r_RF + RP_M(b₎

b. Calculate weighted average cost of capital, using equation: WACC = W_dr_d(1-%) + w_sr_s

c. Calculate the value of operations, using equation: V_ops = FCF₀(1+g)/WACC - g)

d. Calculate the value of the company's equity, using equation: Vs = Vops - debt

e. Calculate the current value of the company's stock.