1. A Corp is evaluating the acquisition of B Corp. A Corps analyst projects the following post merger cash flows for B Corp if purchased by A Corp.

Year 1 Year 2

Net Sales $500 $600

Oper Expenses 300 360

Interest 20 25

Depreciation 10 10

Net Investment 10 10

In Operating Capital

The current market beta for B Corp is 1.4 and its tax rate is 25% and debt ratio of 30%. A Corp has a tax rate of 25%. Assume a market return of 12% and a risk free rate of 6%.

a. What is the appropriate discount rate to use in calculating the value of the acquisition? (Use the adjusted present value method).

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

c. If we assume constant growth of 4% after the year 2 and beyond, calculate the horizon value of free cash flows and the horizon value of tax shield flows.

d. Find the value of company operations. (no non-operating assets)