Chapter 21 Homework eBook Problem Walk-Through Aubey Appliance Corporation is considering a merger with the Velore Vacuum Company. Velmore is publicly traded company, and its current beta is 1.30. Velmore has been barely profitable, so it has paid an average of only 20% in taxes during the last several years. In additional, it uses little debt, having a debt ratio of just 25% If the acquisition were made, Aubey would operate Velmore as a separate, wholly owned subsidiary. Aubey would pay taxes on a consolidated basis, and the tax rate would therefore increase to 35%. Aubey also would increase the debt capitalization in the velmore subsidiary to 40% of assets, which would increase its beta to 1.47. Aubey's acquisition department estimates the Velmore, if acquired, would produce the following cash flows to Aubey's shareholders (in millions of dollars) Year Cash Flows $1.25 1.40 1.55 1.70 5 and beyond Constant growth at 7% These cash flows include all acquisition affects. Aubey's cost of equity is 13%, its beta is 1.0, and its cost of debt is 10%. The risk-free rate is 7%. Do not round intermediate calculations. a. What discount rate should be used to discount the estimates cash flows? (Hint: Use Aubey's s to determine the market risk premium.) Round your answer to one decimal place b. What is the dollar value of Velmore to Aubey? Enter your answers in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimals places. million c. Velmore has 1.2 million common shares outstanding. What is the maximum price per share that Aubey should offer for Velmore? Round your answer to the nearest cent. If the tender offer is accepted at this price, what will happen to Aubey's stock price? Aubey's share price should -Select- its current price