Compute the value of Hughes if GM’s cost of capital is used as a discount rate instead of the cost of capital computed from the comparison firms.

In 1989, General Motors (GM) was evaluating the acquisition of Hughes Aircraft Corporation.
Recognizing that the appropriate discount rate for the projected cash flows of Hughes was different than its own cost of capital, GM assumed that Hughes had approximately the same risk as Lockheed or Northrop, which had low-risk defense contracts and products that were similar to Hughes. Specifically, assume the following inputs:AppendixLO1

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Comparison BE DIE GM 1.20 .40 Lockheed 0.90 .90 Northrop 0.85 .70 D Target for Hughes's acquisition = 1 E Hughes's expected cash flow next year = $300 million Growth rate of Hughes's cash flows = 5 percent per year Appropriate discount rate on debt (riskless rate) = 8 percent Expected return of the tangency portfolio = 14 percent