Question
Please show formulas and steps so I can learn. Thank you Sears Inc. has the following financing outstanding: Debt: 450,000 bonds with a coupon rate
Please show formulas and steps so I can learn. Thank you
Sears Inc. has the following financing outstanding:
- Debt: 450,000 bonds with a coupon rate of 6.5% and a current price of 80% of par. The bonds have 15 years to maturity and a par value of $1,000. The bond has semiannual compounding.
- Equity: 2.9 million shares of common stock with a current price of $90 per share and the beta of the stock is 1.30.
- Market: The corporate tax rate is 21%, the expected market return is 11.0%, and the risk-free rate is 1.26%.
Sears is considering purchasing Broke N Bored Grill, a privately held restaurant. Broke N Bored currently has debt outstanding with a market value of $25 million. The EBIT for Broke N Bored next year is projected to be $19 million. EBIT is expected to grow at 12% per year for the next five years before slowing to 3% in perpetuity. Change in Net Working Capital, Capital Spending, and Depreciation as a percentage of EBIT are expected to be 11%, 3%, and 2%, respectively. Broke N Bored has 10 million shares outstanding and the tax rate is 21%.
- What is the after-tax cost of debt for Sears Inc?
- What is the cost of equity for Sears Inc?
- What is the weight of debt and weight of common stock for Sears Inc?
- What discount rate should Sears use to evaluate the potential purchase of Broke N Bored?
- What are the Cash Flows for Broke N Bored expected to be in Years 1 - 5 (i.e., what is CF(A) for Years 1 - 5)?
- What is the terminal value of Broke N Bored's cash flows?
- What is the total value of Broke N Bored Grill worth to Sears today?
- What is the value of Broke N Bored equity?
- What is the maximum price per share Sears should be willing to pay for Broke N Bored?
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