In 1968, Kennecott Copper Corporation made a precipitant termination when it acquired Peabody Coal Company. In the geezerhood preceding the acquisition, Kennecott had experient round-eyed swings in its profitability, which it was looking to offset by diversification. expend in another company in a diametric constancy was an intelligent decision; however, Peabody was the wrong company to do this with. Although Peabody had been fat and stable over the past few years leading(p) up to the acquisition, the internal rate of return related to the investing was not high enough to justify a barter for of the company. Peabodys comprise of debt was .038. This was calculated by assuming a 40% tax rate and .095 rate on debt (Exhibit 3). There was a .095 interest rate on notes payable due June 30, 1998; therefore, we imitation the rate of debt at the time of purchase would have been similar. Also, Peabodys cost of equity was .1397. This was calculated by using a risk-fre e rate of .055, which was the rate of the 90-day T-bill in 1968. A beta of 1 was assumed and a .082 market risk premium was used. The give-up the ghost mentioned experience was inflexible by taking the average returns on the short-term T-Bill rate from 1951-1975. This rate was used because we know Peabody was a short-term investment and the years 1951-1975 give a to a greater extent than accurate reflection of the market return than using the witness from 1926-1987. Furthermore, the weight of debt and equity were .35 and .65 respectively. These figures were used because we are told that approximately 65% of Kennecotts net worth was tied up in Peabody. These figures gave a weighted average cost of capital of 9.70%. The IRR for this purchased was calculated by using $621.5 million as the initial investment. This figure was obdurate as a... If you want to get a full essay, prepare it on our website: OrderEssay.net
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