The Following Information Is Available About Chiantivino Corp

question 10

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. $\begin{array}{llcc} \text { Stock price per share } & \$8.00 \\ \text { Common shares outstanding (millions) } &10\\ \text {Market value of interest-bearing debt (millions) } &\$75\\ \text {Weighted-average cost of capital } &14\%\\ \end{array}$

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Definitions:

Credits

An accounting entry that increases liabilities and equity or decreases an asset or expense account in double-entry bookkeeping.

Insurance Expense

The cost incurred by a business for insurance coverage, recognized as an expense over the policy period.

Prepaid Insurance

An asset account that represents insurance premiums paid in advance, which are expensed over the period the insurance coverage pertains to.

Accounts Receivable

Funds that customers owe to a company for products or services provided but not yet compensated for.