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Lamda corporation wants to acquire another company within its industry for $100m and it expects the acquisition to contribute to its free cash flow

 

Lamda corporation wants to acquire another company within its industry for $100m and it expects the acquisition to contribute to its free cash flow by $5m the first year, and this contribution is expected to grow annually by 3% thereafter. Lamda currently has a constant debt- to-equity ratio of 1, 6% cost of debt, 10% cost of equity and pays 21% company will maintain a constant debt-equity ratio for the acquisition. a) Compute Lamda's unlevered cost of capital. b) Compute the unlevered value of Lamda's acquisition. corporate tax. The c) Suppose Lamda issues new debt of $50 million initially to fund the acquisition, compute the present value of the interest tax shield for this acquisition. d) Suppose Lamda issues new debt of $50 million initially to fund the acquisition, compute the total value of this acquisition using the Adjusted Present Value method.

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