14. You have been given the job of evaluating the following merger candidate. You have collected the following cash flow for the acquisition candidate for the proposed merger (in millions): Year 1 2 3 4 5__ Candidates cash flows now 80 85 115 145 180 Additional cash flows with merger 40 90 145 145 170 Total cash flows with merger 120 175 260 290 350

Risk free rate of return 3.0% Beta for this project (the company after merging) 1.4 Market risk premium 5.5% Pre-tax cost of debt 9.5% Marginal tax rate 30% Number of shares outstanding for the target company (millions) 55 Current market price per share for the target company $60 Percentage of the acquisition financed with debt 60% Percentage of the acquisition financed with common equity 40%

What is the after tax cost of debt?

What is the after tax cost of common equity

What is the weighted average cost of capital for this acquisition candidate?

What is the maximum price per share you are willing to pay for this candidate?

Based on the numbers above, would you pursue this candidate?