An all-equity financed company has a cost of capital of 10percent. It owns one asset: a mine capable of generating $100million in free cash flow every year for five years, at which timeit will be abandoned. A buyout firm proposes to purchase thecompany for $400 million financed with $350 million in debt to berepaid in five, equal, end-of-year payments and carrying aninterest rate of 6 percent.
Required:
a. Calculate the annual debt-service payments required on thedebt.
b. Estimate the rate of return to the buyout firm on theacquisition after debt service.
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An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $100
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