A large pet-food manufacturer is considering buying a small boutique cat food business to add to their portfolio of pet foods. The head of the finance division has approached you, a recent TWU graduate, to conduct a financial analysis to determine the most the firm should pay for the cat food business.

The valuation of the cat-food business is based on cash flows of $180,500 per year over a five year period. The target business has the same risk as the firms overall operations. The cost of equity is 15 percent and the cost of debt is 3 percent on an after-tax basis. The firms capital structure consists of 10 million in equity and 8 million in debt.

1. Calculate the WACC for this firm?

2. What is the most the firm can pay for the business per its required return (WACC) ?

3. How would a change in the WACC change the amount the firm would be willing to pay for the cat food business?

Please show work and explain