Answer 12-
Firm’s ROI over the last 10 years = 18%
Market’s ROI = 15%
Current market value of Seven Sea’s holdings is $10 billion
The market value of Seven Seas is
$10000(0.15)(1.05)/(0.12-0.05) = $22,500 million.
Even if the fund didn’t grow at all, its current market value would be
10000(0.15)/0.12 = $12.5 billion.
However, in addition to this, it expects to grow 5%.
Answer 13(a)
Total current market value of Crusoe is $5 billion
Intel has to pay $1.5 billion to acquire 20% stake
Intel is paying a premium of 1.5/[(0.2)(5)] – 1 = 50% for its 20% stake.
(b)
COC = 12%
Let x be the after-tax cash flow that Intel will earn on its invested $1.5 billion.
The net present value of the cash flows would be x1-1.12-5]/0.12 = 0.5 billion.