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# Solution

## Cost of land = \$60 million

Pre tax earning will increase by \$ 14 million in perpetuity
Cost of capital = 12.5%
Issue of Bond at 8% coupon rate.
Tax rate = 40%
Company issue 30 % debt and 70 % equity to purchase the land.
Assume bond has a par value of \$1000
Amount of debt = (60 million * 30 %) = \$18 Million
Amount of Equity = ( 60 million * 70% ) = \$42 Million
Therefore number of bond required to be issued = (\$18 million / 1000) = 18000 Bonds.
Coupon on the bonds = (18000*8%*1000) = \$ 1.44 millions.
Share price = \$35.50
Number of shares reqquired to be issued = (\$ 42 million /35.50) = 1.183 million (approximately).
Therefore total number of shares = (20 million + 1.183 million )= 21.183 million shares.

Pr
Less : Coupons on Bonds( Sh
Profit aft
less :
Pro

Earnin

## Therefore share price = (P/E

S
Therefore value of th

Note: If we don’t assume the P/E ratio then the ALTERNATIVE solution would

## Value of the company prior to acq

Less :
Add: increase in profit (Calcula

## Cost of land = \$60 million

Pre tax earning will increase by \$ 14 million in perpetuity
Cost of capital = 12.5%
Issue of Bond at 8% coupon rate.
Tax rate = 40%
Company issue debt to purchase the land.
Assume bond has a par value of \$1000

Therefore number of bond required to be issued = (\$60 million / 1000) = 60000 Bonds.
Coupon on the bonds = (60000*8%*1000) = \$ 4.8 millions.

Pr
Less : Coupons on Bonds( Sh
Profit aft
less :
Pro

## Value of the company prior to acq

Less :
Add: increase in profit (Calcula
Option -3 Company Issues Equity 100 % .

## Cost of land = \$60 million

Pre tax earning will increase by \$ 14 million in perpetuity
Cost of capital = 12.5%
Tax rate = 40%
Company issue Equity to purchase the land.
Current share price = \$ 35.50
Therefore number of Shares required to be issued = (\$60 million / \$35.50) = 1.690 Million shares (approximately)
Total number of shares = (20 million + 1.69 ) = 21.69 million.

Pr
less :
Pro

## Value of the company prior to acq

Less :
Add: increase in profit (Calcula

## Therefore the company should issue equity to purchase land.

Amount in Million
(in \$)

14
1.44
12.56
5.024
7.536

A/i
Profit
cost of capital

(\$7.536 / 12.5%)
\$60.288 Million

(1/ 12.5%)
8

## Profit after tax / Number of

share
( \$60.288 / 21.183)
\$2.8461 per share

(8*2.8461)
\$ 22.77
21.183 million share * 22.77
\$482.34 million

\$710 Million
(\$60 Million)
\$ 60.288 Million
\$ 710.288 Million

Amount in Million
(in \$)

14
4.8
9.2
3.68
5.52

A/i
Profit
cost of capital

(\$ 5.52 / 12.5%)
\$44.16 Million

\$710 Million
(\$60 Million)
\$ 44.16 Million
\$ 694.16 Million

Amount in Million
(in \$)

14
5.6
8.4

A/i
Profit
cost of capital

(\$ 8.40 / 12.5%)
\$67.20 Million

\$710 Million
(\$60 Million)
\$ 67.20 Million
\$ 717.20 Million