Green Mountain Breweries is considering an acquisition of Ritta Markets. Ritta currently has a cost of equity of 10%; 25% of its financing is in the form of 6% debt, the rest in common equity. Its federal-plus-state tax rate is 40%. After the acquisition, Green Mountain expects Ritta to have the following FCFs and interest payments for the next 3 years (in millions):

After this, the free cash flows are expected to grow at a constant rate of 5%, and the capital structure will stabilize at 35% debt with an interest rate of 7%.
a. What is Ritta’s unlevered cost of equity? What are its levered cost of equity and cost of capital for the post-horizon period?
b. Using the adjusted present value approach, what is Ritta’s value of operations to Green Mountain?

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FCF Interest expense Year 1 $10.00 28.00 Year 2 $20.00 24.00 Year 3 $25.00 20.28