You own a small fast-food company, which generates a free cash flow of
$5 million per year in perpetuity. The cost of capital for your company
is estimated to be 10%. Brisco, a listed company, just informed you that
it would like to buy your company. According to Brisco’s offer, you
will receive 2.4 million shares of Brisco, with each share currently
trading at $3.3 per share. You can sell the shares of Brisco that you
will receive in the market at any time. In the offer, Brisco also agrees
that after one year, it will buy the shares back from you for $3.7 per
share if you desire. Suppose the current one-year risk-free rate is
6.5%, the volatility of Brisco stock is 18%, and Brisco does not pay
dividends. The value of this offer is closest to: (6 marks)
$5 million per year in perpetuity. The cost of capital for your company
is estimated to be 10%. Brisco, a listed company, just informed you that
it would like to buy your company. According to Brisco’s offer, you
will receive 2.4 million shares of Brisco, with each share currently
trading at $3.3 per share. You can sell the shares of Brisco that you
will receive in the market at any time. In the offer, Brisco also agrees
that after one year, it will buy the shares back from you for $3.7 per
share if you desire. Suppose the current one-year risk-free rate is
6.5%, the volatility of Brisco stock is 18%, and Brisco does not pay
dividends. The value of this offer is closest to: (6 marks)
Select one:
a. $8.64 million
b. $7.52 million
c. $8.74 million
d. $7.62 million
