Next, we will introduce the financing of the transaction. The acquirer will invest $3.0B of their own capital, borrowing an additional $2.0B in debt to bring them to the estimated price to acquire the equity mentioned at the start of $5.0B. HOWEVER, the target ALREADY has $750M of debt in its capital structure. Thus, as well as the $2.0B already noted, the acquirer will also have to secure $750M in financing to replace this debt.3

The $2.0B will be a perpetual bond, paying interest at 6.0%. In reality, the company will issue 20-year bond, which it will be refinanced when it matures. But, for practical purposes, the $2.0B in debt, can be assumed constant forever.

The debt of $750M will be a bridge loan. It will be repaid in full from the targets cash flow in two years. Each year, interest of 8.0% will be paid on the debt.

4. What is the present value of the tax shield from the interest payments on the debt? (5 points)

5. The acquirers analyst team believes that if bankruptcy occurs, this will happen at the end of year 2 when the bridge loan is repaid. If that happens, the acquirer will lose their entire $3.0B equity investment. If the chances of this happening is 20%, and the appropriate discount rate is the cost of the bridge loans debt, what is the present value of the risk of financial distress? (3 points)