On behalf of your firm, you are evaluating a privately held takeover target. The table below contains

Question:

On behalf of your firm, you are evaluating a privately held takeover target. The table below contains metrics for two comparable publicly traded firms that are in the same general business and are similar in size compared to the acquisition target. You decide to equally weight all the comp data to estimate the correct to use in valuing the target. The target will be financed with 20% debt, with a pretax equal to 4%, and the debt beta is assumed to equal 0. Assume that all of the firms in your analysis are in the 35% tax bracket and that all of the firms have a policy to leave their debt ratio constant. Answer the following questions regarding the correct to use in valuing the target. For all parts of this problem, assume a risk-free rate of 3% and a market risk premium of 6%.

a. What is the estimated firm or asset (unlevered equity) beta for the target firm based on the comp data?
b. What is the estimated levered cost of equity for the target based on the comp data and the target€™s debt/ value ratio of 20%?
c. Using the equity cost already calculated and the information on the cost of debt in the problem, what is the WACC to use in discounting the target€™s projected firm free cash flows?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...