Apilado Appliance Corp ( Show calculations)

Question 4 [15 Marks] Aplado Apphance Corporation is considernng a merger with the Vaccaro Vacuum Company Vaccaro is a publicty traded company, and its current beta is 130 Vaccaro has been barely profitable, so it has paid an average ol only 20% in taxes during the last several years In addition, t uses little debt, having a debt rato of just 25% If the acquisition were made, Apilado would operate Vaccaro as a separate, wholly owned subsidiary Aplado would pay taxes on a consolidated basis, and the tax rate would, therefore, increase to 35% Aplado also would increase the debt capitalisation in the Vaccaro subsidiary to 40% of assets, which would increase its beta to 1 47 Apilado's acquisition department estimates that Vaccaro, if acquired, would produce the folfowing cash flows to Apilado's shareholders (in millons of rands) Year Cash Flows R1 30 R1 50 R175 R2 00 5 and beyond Constant growth at 6% These cash flows include all acquisition effects Apilado's cost of equity is 14%, its beta is 1 0, and its cost of debt is 10% The nsk-free rate is 8%