Coltec Aerospace is a manufacturer of aircraft engine and parts.It is looking to make an acquisition of Lance Corp., a maker of specialty landing gears.Coltec has an unlevered _e of 1.5 and is levered with 30% debt/(debt+equity).Coltec's k_d is 7.50% and _d is 0.3.Assume the tax rate is 25%, MRP is 7.00%, and risk-free rate is 2.00%.

Lance's unlevered _e is 0.75 and its unlevered annual free cash flow is $75M.Coltec's CFO has tasked you with evaluating the attractiveness of a potential Lance acquisition.

An acquisition of Lance would cost Coltec a total of $900M.Coltec expects to finance the Lance transaction using 50% debt (at Coltec's cost of debt) and 50% equity.Coltec expects to be able to increase Lance's unlevered annual free cash flow by $15M due to various cost savings and revenue synergy opportunities.

For questions A-C, assume all free cash flows continue in perpetuity with no growth (g = 0%) and there are no debt principal repayments.

A)What is the NPV of the Lance acquisition using Coltec's WACC? Should Coltec acquire Lance based on Coltec's WACC?

B)What is the appropriate WACC to use to value Lance?

C)What is the NPV of the Lance acquisition using the appropriate WACC? Should Coltec acquire Lance?