AA Corporation is considering a merger with the VV. VV is a publicly traded company, and its current beta is 1.30. VV has been barely profitable, so it has paid an average of only 20% in taxes during the last several years. In addition, it uses little debt, having a debt ratio of just 25%. If the acquisition were made, AA would operate VV as a separate, wholly owned subsidiary. AA would pay taxes on a consolidated basis, and the tax rate would therefore increase to 35%. AA also would increase the debt capitalization in the WV subsidiary to 40% of its assets, which would increase its beta to 1.47. AA's acquisition department estimates that VV, if acquired, would produce the following cash flows to AA' s shareholders (in millions of rands): Year 1 Cash flow = R1.30 Year 2 Cash flow = R1.5 Year 3 Cash flow = R1.75 Year 4 Cash flow = R2 Year 5 and beyond - Cash flow = Constant growth 6% These cash flows include all acquisition effects. AA's cost of equity is 14%, its beta is 1.0, and its cost of debt is 10%. The risk-free rate is 8%. Questions 1.1 What discount rate should be used to discount the estimated cash flows? (Hint: Use AA's rs to determine the market risk premium). (2) 1.2. What is the rand value of VV to AA? (6) 1.3. Vaccaro has 1.2 million common shares outstanding. What is the maximum price per share that AA should offer for VV? If the tender offer is accepted at this price, what will happen to AA's stock price? (2)