Question
You are valuing a potential take-over target, a private sports shoe manufacturer. Let's walk through some important questions. 1) Your colleague collects the information in
You are valuing a potential take-over target, a private sports shoe manufacturer. Let's walk through some important questions.
1) Your colleague collects the information in Table 1. Included are D/E ratios and estimated equity betas for firms similar to the take-over tarket, the target firm's Debt-to-Firm Value ratio, the target firm's tax rate, and the average YTM and coupon payments for their outstanding debt. Using this data, find the appropriate WACC for this investment decision.
D/E | Equity Beta | Target D/V | 20% | ||
Competitor 1 | 29.90% | 2.68 | Tax Rate | 40% | |
Competitor 2 | -7.60% | 1.94 | Average YTM | 6% | |
Competitor 3 | 32.20% | 1.92 | Average Coupon | 6.50% | |
Competitor 4 | 49.70% | 1.12 | Equity Market Risk Premium | 5% | |
Competitor 5 | 21.70% | 0.97 | Treasury Note | 4.93% | |
Competitor 6 | 34.30% | 2.13 | |||
Competitor 7 | 28.50% | 1.27 | |||
Competitor 8 | -6.70% | 1.01 | |||
Competitor 9 | 42.60% | 0.98 |
Hint: Firm Value is Debt + Equity. Therefore, D/(D+E) = 0.2. Use this to solve for D/E, the target firm's leverage ratio.
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