The following information is available about Chiantivino Corp.(CC):
An activist investor is confident that by terminating CC's money-losing fortified wine division,she can increase free cash flow by $4 million annually for the next decade.In addition,she estimates that an immediate,special dividend of $10 million can be financed by the sale of the division.a.Assuming these actions do not affect CC's cost of capital,what is the maximum price per share the investor would be justified in bidding for control of CC? What percentage premium does this represent?
b.Show your answer if you conduct a sensitivity analysis by assuming the cost of capital is 15 percent and the increased cash flow is only $3.5 million per year. $\begin{array}{llcc}
\text { Stock price per share } & \$8.00 \
\text { Common shares outstanding (millions) } &10\
\text {Market value of interest-bearing debt (millions) } &\$75\
\text {Weighted-average cost of capital } &14\%\

\end{array}$

Question

The following information is available about Chiantivino Corp.(CC):
An activist investor is confident that by terminating CC's money-losing fortified wine division,she can increase free cash flow by $4 million annually for the next decade.In addition,she estimates that an immediate,special dividend of $10 million can be financed by the sale of the division.a.Assuming these actions do not affect CC's cost of capital,what is the maximum price per share the investor would be justified in bidding for control of CC? What percentage premium does this represent?
b.Show your answer if you conduct a sensitivity analysis by assuming the cost of capital is 15 percent and the increased cash flow is only $3.5 million per year. $\begin{array}{llcc}
  \text { Stock price per share } & \$8.00 \
 \text { Common shares outstanding (millions) } &10\
 \text {Market value of interest-bearing debt (millions)  } &\$75\
 \text {Weighted-average cost of capital  } &14\%\
 
\end{array}$

Quizplus · Accepted Answer

The Answer of The following information is available about Chiantivino Corp.(CC):
An activist investor is confident that by terminating CC's money-losing fortified wine division,she can increase free cash flow by $4 million annually for the next decade.In addition,she estimates that an immediate,special dividend of $10 million can be financed by the sale of the division.a.Assuming these actions do not affect CC's cost of capital,what is the maximum price per share the investor would be justified in bidding for control of CC? What percentage premium does this represent?
b.Show your answer if you conduct a sensitivity analysis by assuming the cost of capital is 15 percent and the increased cash flow is only $3.5 million per year. $\begin{array}{llcc}
  \text { Stock price per share } & \$8.00 \
 \text { Common shares outstanding (millions) } &10\
 \text {Market value of interest-bearing debt (millions)  } &\$75\
 \text {Weighted-average cost of capital  } &14\%\
 
\end{array}$

The Following Information Is Available About Chiantivino Corp