1. What are the current capital structures of the companies? Calculate the Weighted Average Cost of Capital (WACC) of each company? Calculate the Free Cash Flow (FCF) of each company? What is the value of each company according to the MM Model with corporate taxes of 21%?
2. The companies are planning to use new debt to buy back 25% of their common stocks. What are the stock prices of each company after the recapitalizations? How many common shares will each company have after the recapitalizations? Is this recapitalization a good idea? Why or why not?
3. Now assume the larger company is purchasing the smaller company. This will cause its Free Cash Flow (FCF) to increase by 10% in the first two years then by 2% from here on. Using the Adjusted Present Value (APV) Model what is the maximum price per share should the larger company offer? Is this purchase a good idea? Why or why not?