As chairman of Alpha Inc you are evaluating a potential move to aquire Beta Corp

Question

As chairman of Alpha Inc you are evaluating a potential move to aquire Beta Corp. You both have similar risk. "Alpha Inc" has a WACC of 9%. Beta Corp finished the past fiscal year with $3,250,000 in FCF (free cash flow). Beta Corp also has $12,000,000 in debt, $2,500,000 in marketable securities, 4 million shares in common stock and 1 million shares in preferred stock. Preferred stock is trading at $22. If free cash flow for beta corp will grow at 4% annually, what is the most you are willing to pay per share of Beta Corps common stock?

Explanation / Answer

Here first we need to compute value of Beta Corporation:

V= FCF ( 1+g)/(Ke-g)

= 3,250,000 x(1+0.04)/(0.09-0.04)

= 67,600,000

Value of equity = value of firm –Debt - preferred stock

= 67,600,000 – 12,000,000 –(1,000,000x22)

= 33,600,000

Price per share = value of equity/ no. of stocks outstanding

= 33,600,000/4,000,000

=8.40 per share

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