11.12

Exercises 11.10-11.14 make use ofthe following date Gener al Motors (GM) was evaluating the on. acquisition of Hughes Aircraft the appropriate discount rate for cognizing the projected cash flows of Hughes was differen than its own cost of capital, GM assumed tha Hughes had approximately the same risk as Lockheed or Northrop, which had Tow-nisk defense contracts and products that were similar to Hughes. Specifically, assume the following inputs: BE 1.20 0.90 0.85 DIE 40 90 .70 Comparison GM Lockheed Northrop Target-for Hughes,sacquisition = 1 Hughes's expected cash flow next year Growth rate of Hughes's cash flows Appropriate discount rate on debt (riskless Expected return of the tangency portfolio - - $300 million - 5 percent per year rate) 8 percent - 14 percent 11.10. Analyze the Hughes acquisition (which t ook place) by first computing the betas of the comparison firms, Lockheed and Northrop, as i they were all equity financed. Assume no taxes. 11.11. Compute the beta of the assets of the Hughes acquisition, assuming no taxes, by taking the average of the asset betas of Lockheed and Northrop. 11.12. Compute the cost of capital for the Hughes acquisition, assuming no taxes. 11.13. Compute the value of Hughes with the cost of capital estimated in exercise 11.12