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PROBLEM 8 Healthinfo Corporation is considering the acquisition of MDWeb Company. MDWeb has a capital structure consisting of $5 million (market value) of 11 percent
| PROBLEM 8 | ||||||||
| Healthinfo Corporation is considering the acquisition of MDWeb Company. MDWeb has a capital | ||||||||
| structure consisting of $5 million (market value) of 11 percent bonds and $10 million (market value) of | ||||||||
| common stock. MDWeb's premerger beta is 1.36. Healthinfo's beta is 1.02, and both it and MDWeb | ||||||||
| face a 40 percent tax rate. Healthinfo's capital structure is 40 percent debt and 60 percent equity. The | ||||||||
| free operating cash flows from MDWeb are estimated to be $4.0 million for each of the next four years | ||||||||
| and a terminal value of $15.0 million in Year 4. Currently, the risk-free rate is 6.0 percent, and the | ||||||||
| market risk premium is 4.0 percent. What is the value of MDWebs equity to Healthinfo? | ||||||||
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