Tundra Corporation is interested in acquiring Tantrell Corporation. Tantrell has 2 million shares outstanding and a target capital structure consisting of 40 percent debt. Tantrell’s debt interest rate is 8 percent. Assume that the risk-free rate of interest is 3 percent and the market risk premium is 7 percent. ,,Tantrell’s free cash flow (FCF0) is $3 million per year and is expected to grow at a constant rate of 6 percent a year; its beta is 1.2. Tantrell has $5 million in debt. The tax rate for both companies is 30 percent.,,a. Calculate the required rate of return on equity using equation: rs= rRF + RPM(b) ,,b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs , ,c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC – g) , ,d. Calculate the value of the company’s equity, using equation: Vs = Vops – debt , ,e. Calculate the current value of the company’s stock, using equation: , Price per share = Vs/shares outstanding ,, , ,,
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