In 2018, Algae Inc, a leading producer of industrial materials, was acquired by Refine, the then competing producer in the world. The acquisition was conducted based on the consideration that Algae was being poorly managed and that Refine would eliminate inefficiencies and improve the performance of Algae. Algaes assets. In addition, Refine expected synergies, in the form of both cost savings. Use the following data to value Algae and the control of Refine.

Algae had EBIT of $421.33million in 2017, which came from a pre-tax operating margin of 3.5% on revenues of $12,038 million and an after-tax return on capital of 7.32%; the firm had a tax rate of 36%. Its beta is 1.15, after-tax cost of borrowing is 5% and debt ratio is approximately 15%. The risk-free at the time of the analysis was 5%.

1. Calculate Algaes cost of debt.
2. Calculate Algaes cost of equity.

Furthermore, Algae had capital expenditures of $365 million, depreciation of $352 million, and working capital is 15% of revenues.

• Operating income, net capital expenditures and revenues would grow 8% a year for the next 5 years.
• After year 5, operating income and revenues would grow 5% a year forever.
• After year 5, capital expenditures will be 100% of depreciation and depreciation grows at 5%.
• The debt ratio remained at 15%, but the after-tax cost of debt dropped to 3% and the beta dropped to 1.

3. What is Algaes new cost of equity after year 5
4. What is Algaes new cost of capital after year 5.
5. What is Algaes horizon (terminal) value?
6. What is the total value of Algae?

After the merger, Algae will raise its debt ratio to 20%.

7. What is Algaes unlevered beta?
8. What is Algaes new beta under the new debt ratio?
9. What is Algaes new cost of equity?
10. What is Algaes new cost of capital?