Ace Textile Mills Limited is evaluating the acquisition of Zulu Textile Mills Limited

(target firm). The following data pertains to Zulu Textile Mills Limited, the target

company:

Debt Ratio: 25 percent. Rate of Interest on debt: 6 percent. Tax rate: 40 percent

Equity Ratio: 75 percent. Cost of Equity: 10 percent

After acquisition, Zulu is expected to generate three annual free cash flows of Rs. 10

million, Rs. 20 million and Rs. 25 million in the first, second and third year respectively.

After the third year, free cash flows are expected to grow at a constant growth rate of

five percent per year. Interest payments in the three years after acquisition are estimated

to be Rs. 28 million, Rs. 24 million, and Rs. 22 million respectively. Interest expenses are

also expected to grow at the same rate as the free cash flows. Three years after the

acquisition, the firm's capital structure would stabilize at 35 percent debt with an

interest rate of 7 percent.

Required:

I. Compute the un-levered cost of equity of the target company?

II. Compute the levered cost of equity of the target company for the post horizon period?

III. Compute the WACC for the post horizon period of Zulu Textile?

IV. Compute the unlevered value of operations of the target firm?

V. Compute the unlevered value of tax shield of Zulu Textile?

VI. What is the total Unlevered Value of Zulu to Ace Textile Mills Limited?