M&A. For this and the next 2 questions: Magiclean Corporation is considering an acquisition of Dustvac Company. Dustvac has a capital structure consisting of $5 million (market value) in 11% bonds and $10 million (market value) of common stock. Dustvac's pre-merger beta is 1.36. Magiclean's beta is 1.02 and both it and Dustvac face a 40 percent tax rate. Magiclean's capital structure is 40% debt and 60% equity. The free cash flows from Dustvac are estimated to be $3.0 million for each of the next four years and a horizon value of $10.0 million in Year 4. Tax savings are estimated to be $1 million for each of the next 4 years and a horizon value of $5 million in Year 4. Additionally, new debt would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of 8%. Currently, the risk-free rate is 6% and the market risk premium is 4%. Dustvac's pre-merger WACC is 9.83%.

7) Under the APV approach, calculate unlevered cost of equity using the following formula: wdrd + wErEL.

A) 10.01%

C) 11.29%

D) 11.44%

E) 13.49%

16) Which of the following statements is TRUE? [I] An increase in depreciation expenses would generally cause a firm's net income to rise [II] An increase in depreciation expenses would generally cause a firm's net cash flow to rise [III] If a single project has a normal cash flow pattern, the NPV, IRR and MIRR would give the same accept/reject decision [IV] When a project has non normal cash flows, there may be more than one IRR although the MIRR would usually produce a unique solution [V] If mutually exclusive projects have unequal lives, the IRR, and not the NPV, should be used to make capital budgeting decision

A) II, III, IV

C) I, III, IV

D) II, IV, V

E) IV and V

30) Based on the published data, one can determine that the SUM of the company's net operating profit after taxes (NOPAT) and depreciation charges for the period is called:

B) Operating cash flow, and is equal to $12.11 billion

C) Free cash flow, and is equal to $8.57 billion

D) Operating cash flow, and is equal to $8.68 billion

E) Not enough information to determine