The Following Information Is Available About Chiantivino Corp.(CC)

question 14

Essay

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.

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Definitions:

Adjusting Entries

Journal entries made at the end of an accounting period to allocate income and expenditures to the period in which they actually occurred.

Prepaid Property Tax

An expense that has been paid in advance for property taxes, recognized as a current asset until the period it covers arrives.

Bonds

Fixed income investments representing a loan made by an investor to a borrower, often corporate or governmental, which pays periodic interest payments.

Discount

A reduction from the full price or value of a good, service, or financial instrument.