5.8 North American Labels, Inc. is made up of two business units: Pinkerton and Pipedream.

Great Dane Capital (GDC) has identified North American as a possible takeover target.

Estimates of the expected performance of each unit after acquisition, breakup, and resale are as follows:

Pinkerton Pipedream Invested capital (millions) 2,000 $1,000 Growth rate 5% 10%

ROC (= NOPAT/Invested capital)

First 10 years 10% 20%

Thereafter 10% cost of capital Net debt ratio 5% 30%

Beta (levered) 1.0 1.2 Cost of debt 7.0% 7.0%

Tax rate 40% 40%

10-year Treasury note yield 4.3% 4.3%

Equity premium over riskless rate 3.5% 3.5%