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4. (12 Points) Your clothing and apparel company (Triberific) is considering buying out another firm that makes pet apparel (Cavalier Co.). Your boss asks you to estimate the target company's return on assets given some uncertainty about the state of the economy. Analysts agree that a recession is twice as likely as a boom. They predict the returns for Cavalier Co.'s stock to be -5 % and 25 % in a recession and a boom, respectively. And the implied yield on the company bonds they predict to be 4% and 2% in these states, respectively. Cavalier Co. has 100,000 shares of common stock outstanding trading at $1000 per share. Their stock paid a dividend of $10 last year that it expects to grow in perpetuity. The company also has $80M on its books in debt. The debt consists of 10- year bonds with a par value of $1000 with semi-annual coupons (6% annual rate). The corporate tax rate is 30% A. (2 Points) Based on analysts' forecasts, what are the expected returns of Cavalier stocks and bonds, respectively? 2 Points) At what price do we expect Cavalier bonds to be trading? (2 Points) Calculate the company's capital structure. C. p. (1 Point) Using the given information and your answers from parts A-C, calculate Cavalier Co's 0-t)+ xhe WACC. 000 E. (2 Points) Instead of purchasing Cavalier, your firm has another option. It can build a competing business to Cavalier. The project will cost $100 million initially, pay $2 million next year and grow at 2% annually forever. Assume this project's risk is similar to Cavalier's operating risk and would be financed similarly. Is this option a viable alternative? 4. (12 Points) Your clothing and apparel company (Triberific) is considering buying out another firm that makes pet apparel (Cavalier Co.). Your boss asks you to estimate the target company's return on assets given some uncertainty about the state of the economy. Analysts agree that a recession is twice as likely as a boom. They predict the returns for Cavalier Co.'s stock to be -5 % and 25 % in a recession and a boom, respectively. And the implied yield on the company bonds they predict to be 4% and 2% in these states, respectively. Cavalier Co. has 100,000 shares of common stock outstanding trading at $1000 per share. Their stock paid a dividend of $10 last year that it expects to grow in perpetuity. The company also has $80M on its books in debt. The debt consists of 10- year bonds with a par value of $1000 with semi-annual coupons (6% annual rate). The corporate tax rate is 30% A. (2 Points) Based on analysts' forecasts, what are the expected returns of Cavalier stocks and bonds, respectively? 2 Points) At what price do we expect Cavalier bonds to be trading? (2 Points) Calculate the company's capital structure. C. p. (1 Point) Using the given information and your answers from parts A-C, calculate Cavalier Co's 0-t)+ xhe WACC. 000 E. (2 Points) Instead of purchasing Cavalier, your firm has another option. It can build a competing business to Cavalier. The project will cost $100 million initially, pay $2 million next year and grow at 2% annually forever. Assume this project's risk is similar to Cavalier's operating risk and would be financed similarly. Is this option a viable alternative
