The following information is available about Chiantivino Corp. (CC): An activist
ID: 2750308 • Letter: T
Question
The following information is available about Chiantivino Corp. (CC):
An activist investor is confident that by terminating CC’s money-losing fortified wine division, she can increase free cash flow by $4 million annually for the next decade. In addition, she estimates that an immediate, special dividend of $10 million can be financed by the sale of the division.
a. Assuming these actions do not affect CC’s cost of capital, what is the maximum price per share the investor would be justified in bidding for control of CC? What percentage premium does this represent?
Explanation / Answer
Max premium =fair market value under new management- fair market value underexisting management
Fair market value as of now=(8*10mn)+75 mn =$155mn
Fair market value under new management= $155mn+ Present value of cash flow of $4mnfor 10 years+ special dividend of $10mn
We can use PV formulaein excel to find Present value of cash flow of $4mnfor 10 years
=pv(rate,nper,pmt,fv,type)
=PV(14%,10,1,,0)
=5.216
=$155mn+(4*5.216)+10mn= $185.8645
Fair market value of equity= fair market value of company -fair market value of debt
=185.8645-75=$110.8645mn
Per share=110.8645/10= $11.8645
Premium(%)= (new managent- existing)/existing
=(11.8645-8)/8
=38.58%
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