Coffee Inc. will acquire another firm. This will increase their FCF by $5 million at the end of the first year, and this contribution is expected to grow at a rate of 2.8% every year in perpetuity.

Coffee currently maintains a debt-to-value ratio of 0.5, its marginal tax rate is 40%, its (before-tax) cost of debt is 6%, and rE is 10%. Coffee will maintain a constant debt-to-value ratio of 0.5. Thus use WACC method.

a. rU?

b. VU?

c. Assume the acquisition is financed with $62.5 million in new debt initially. What is the PV of all the interest tax shields? Find the value using APV.