4. TTT Corp is evaluating the acquisition of KT Company. TTT analyst projects the following post merger cash flows for KT Company if purchased by TTT Corp.

Year 1 Year 2

Net Sales $600 $700

Oper Expenses 350 400

Interest 20 25

Depreciation 10 10

Net Investment 10 10

In Operating Capital

The current market beta for KT Company is 1.4 and its tax rate is 25% and debt ratio of 40%. TTT Corp has a tax rate of 25%. Assume a market return of 10% and a risk free rate of 4%.

a. What is the appropriate discount rate to use in calculating the value of the acquisition? (Use the Adjusted Present Value Approach).

b. What are the free cash flows for the two years and tax shield for two years?

c. If we assume constant growth of 5% from beyond Year 2, calculate the horizon value of free cash flows and the horizon value of tax shield flows.

d. Find the value of the operations of the target. Assume no non-operating assets. = FCF x (1 +g) / (WACC g)

e. If the market value of debt is $300 and there is no preferred stock, find the maximum price per share that should be offered for the target. Assume there 100 shares of stock.