Question
To finance this acquisition, Big Spenders Inc needs to issue bonds and common shares. Currently, it can issue its 10 years semiannual bonds with 6%
To finance this acquisition, Big Spenders Inc needs to issue bonds and common shares. Currently, it can issue its 10 years semiannual bonds with 6% coupon rate at $990 per bond. Big Spenders is a public company and its share is traded at Toronto Stock Exchange market. The treasure bill earns 3% annually (Rf) and the market premium is 10%. Big Spenderss beta is 1.2 last year. The investment will be financed with 40% debt and 60% equity, both based on market values. Assume the firm's tax rate is 15%.
Looking into further the investment opportunities, the accountant has forecasted the operating cash flows of both companies
.
Operating Cash Flows | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
Auto Wash Bot Ltd | 55,000 | 45,000 | 56,000 | 200,000 | 150,000 |
Popeyes Muscle Wash Ltd | 75,000 | 75,000 | 75,000 | 120,000 | 120,000 |
Explaining to your client which investment criteria the company can use to make its investment decision and what are the pros and cons? Provide the calculation of the investment criteria you select and give recommendation to your client which company they should acquire
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started