Q1. The following information relates to Aberdeen Petroleum Corporation: Aberdee
ID: 2803167 • Letter: Q
Question
Q1.
The following information relates to Aberdeen Petroleum Corporation:
Aberdeen Petroleum:
Dividend payout ratio = 25%
Beta = 1.10
Growth rate = 4%
Peer Group:
Dividend payout ratio = 40%
Beta = 1.20
Growth rate = 5%
Aberdeen Petroleum had earnings per share in the current year of $3.00. The U.S. T-bill rate of return is 3.00% and the market rate of return is 9.50%.
What is the value of Aberdeen Petroleum's stock with managerial control, assuming such control allows the company to improve its performance to the level of its peer group?
Select one:
a. $9.63
b. $11.67
c. $15.40
d. $20.68
e. $21.72
Q2.
The following information relates to two recently merged firms:
FCFF1 = $500,000
Existing Capital Structure:
Equity = $300,000,000
Debt = $100,000,000
Ke = 12.00%
Kd = 6.00%
Optimal Capital Structure:
Equity = $240,000,000
Debt = $160,000,000
Ke = 12.00%
Kd = 7.00%
The perpetual growth rate is expected to be 5.00%. What is the value of the financial synergy for moving to the optimal capital structure?
Select one:
A. $779,534
B. $885,472
C. $909,091
D. None of the above
Explanation / Answer
1)
Re = 3% + 1.2*(9.5% - 3%) = 10.8%
Dividend = 3*(40%) =1.2
Price = 1.2*(1+5%) / (10.8% - 5%) = 21.72 (Option E)
2)
Existing Capital Structure:
Equity = $300,000,000
Debt = $100,000,000
Ke = 12.00%
Kd = 6.00%
We = 300,000,000 / (300,000,000+100,000,000) = 0.75
Wd = 1 - 0.75 = 0.25
WACC = 0.75*12% + 0.25*6% = 10.5%
Value = 500000 / (10.5% - 5%) = 9090909
Optimal Capital Structure:
Equity = $240,000,000
Debt = $160,000,000
Ke = 12.00%
Kd = 7.00%
We = 240,000,000 / (240,000,000+160,000,000) = 0.6
Wd = 1 - 0.6 = 0.4
WACC = 0.6*12% + 0.4*7% = 10%
Value = 500000 / (10% - 5%) = 10000000
Synergy = 10000000 - 9090909 = 909090.9 (Option C)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.