Is there a possible financing motive? Assume the acquirer is AA-rated
Here is two questions from Fin425 project. The mean idea of this project is analysis a firm. I attached project description.
I selected the "Chesapeake energy (CHK) " as the firm.
1. Is there a possible financing motive? Assume the acquirer is AA-rated and has a WACC of 7%. Ifyour firm has a higher WACC (because of higher debt costs, higher risk or inefficient capitalstructure) then it could be made more valuable by being acquired by a stronger firm (this is a basicmotive behind many of Berkshire Hathaway’s acquisitions). Thus, determine your firm’s WACC andEVA (percentages). If the EVA is positive it is a good sign that the firm is finding attractiveinvestment projects.
2. Here are the steps you need to take to get the cost of equity:
a. Determine the beta
b. Determine the riskfree rate: the one-year government bond yield (fromhttp://www.federalreserve.gov/releases/h15/update/default.htm). Yields are shown aspercentages so .55 means .55% not 55%.
c. Pick an equity risk premium (6% or 7%).