22. A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-rm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash ows and sell it for 12 times free cash ow in year 5. Projected free cash ows and selling price are as follows. (S millions) Year 1 2 3 4 5 Free cash ows $25 $40 $45 $50 $ 50 Selling price $600 Total free cash flows $25 $40 $45 $50 $650 To nance the purchase, the investors have negotiated a $400 million, ve-year loan at 8 percent interest to be repaid in ve equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Riskfree interest rate 3 percent Market risk premium 5 percent a. Estimate the target rm's asset beta. b. Estimate the target's unlevered, or all-equity. cost of capital (KA). c Estimate the target's all-equity present value. d. Estimate the present value of the interest tax shields on the acquisition debt discounted at K A. page 333 e. What is the highest price the investors can reasonably justify paying for the target company? f. What does your estimated maximum acquisition price in question (e) assume about the costs of nancial distress