Question
1) Your company is considering acquiring Duff Beer, a company that fits well with the strengths of your company. You estimate that Duff Beer may
1) Your company is considering acquiring Duff Beer, a company that fits well with the strengths of your company. You estimate that Duff Beer may yield $6,833 of free cash flow each year if it is all-equity financed. Your company plans to finance Duff Beer with 38% debt. The rest of its capital will be equity. With the proposed capital structure, you estimate that the required rate of return on the equity is 10% and the business can borrow at an interest rate of 6%. The corporate tax rate is 21%. Please find the value of Duff Beer as a business with the proposed capital structure.
B) Your company is considering acquiring Duff Beer, a company that fits well with the strengths of your company. You estimate that Duff Beer may yield $6,735 of free cash flow each year if it is all-equity financed. Your company plans to finance Duff Beer with 34% debt. The rest of its capital will be equity. With the proposed capital structure, you estimate that the required rate of return on the equity is 8% and the business can borrow at an interest rate of 4%. The corporate tax rate is 21%. Please find the value of Duff Beer to stockholders.
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