. Magiclean Corporation is considering an acquisition of Dustvac Company. Dustvac has a capital structure of 50% debt and 50% equity, with a current book value of $10 million in assets. Dustvacs pre-merger beta is 1.36 and is not likely to be altered as a result of the proposed merger. Magicleans pre-merger beta is 1.02, and both it and Dustvac face a 40% tax rate. Magicleans capital structure is 40% debt and 60% equity, and it has $24 million in total assets. The net cash flows from Dustvac available to Magicleans stockholders are estimated at $4.0 million for each of the next three years and a terminal value of $19.0 million in Year 4. Additionally, new debt issued by the combined firm would yield 10% before-tax, and the cost of equity is estimated at 12.59%. Currently, the risk-free rate is 6.0% and the market risk premium is 5.88%.

1. What is the merged firms WACC?

2. What is the merged firms new beta?

3. What is the appropriate discount rate Magiclean should use to discount the equity cash flows from Dustvac?

4. What is the present value (to the nearest thousand) of the Dustvac cash inflows to Magiclean?

5. If the acquisition price of Dustvac is 155% of Dustvacs current book value of assets, should Magiclean proceed with the acquisition?