Please answer all questions thoroughly and correctly, with working shown clearly. Thanks!

1. Acquisition Incorporated is interested in acquiring Target Corporation. Assume that the risk-free rate of interest is 3%, and the market risk premium is 5%. Acquisition estimates that if it acquires Target, the year-end dividend will remain at $2.34 a share, but synergies will enable the dividend to grow at a constant rate of 6% a year instead of current 4% per year. Acquisition also plans to increase the debt ratio of the new subsidiary, with the effect of raising Target's beta from .9 to 1.1. a) Calculate the current market price for Target. b) Calculate the highest price that Acquisition would be willing to pay for Target. 2. RST Inc. has a capital structure consisting of 35% debt and 65% equity. Their debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM - rRF) is 5%. Using the CAPM, RST estimates that its cost of equity is currently 12%. The company has a 40% tax rate. a. What is RST's current WACC? Round your answer to two decimal places. b. What is the current beta on RST's common stock? Round your answer to two decimal places. c. What is RST's unlevered beta, bU? RST's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 9.5%. The proposed change will have no effect on the company's tax rate. d. What would be the company's new cost of equity if it adopted the proposed change in capital? e. What would be the company's new WACC if it adopted the proposed change in capital structure? f. Based on your answer to part e, would you advise RST to adopt the proposed change in capital structure? Why/why not? 6. The current price of a share of NOP Company's stock is $55. A call option for this stock permits the holder to purchase one share at an exercise price of $60. These options will expire at the end of 1 year, at which time NOP's stock will be selling at one of two prices, $50 or $70. The risk-free rate is 6%. You have been asked to perform the following tasks to arrive at value of the firm's call options. a. b. c. d. e. Explain how you create a riskless hedged investment. What will be the value of this portfolio in one year? What is the cost of the stock in the riskless portfolio? What is the present value in the riskless portfolio? What is the value of the firm's call option? 5. Ace Appliance Corporation is considering a merger with the Vox Purification Systems Co. Vox is a publicly traded company, and its current beta is 1.2. Vox has been barely profitable, so it has paid an average of only 20% in taxes during the last several years. Its debt ratio (to capital) is just 25%. If the acquisition were made, Ace would operate Vox as a wholly owned subsidiary. Ace would pay taxes on a consolidated basis, increasing Vox tax rate to 40%. Ace also would increase the debt capitalization in the Vox subsidiary, which would increase its beta to 1.4. Ace's acquisition department estimates Vox, if acquired, would produce the following additional cash flows to Ace's shareholders (in millions of dollars): Year Cash Flows 1 $1.10 2 1.30 3 1.60 4 1.90 5 and beyond Constant growth at 7% Ace's cost of equity is 14%, its beta is 1.0, and its cost of debt is 10%. The risk-free rate is 6%. a. What discount rate should be used to discount the estimates cash flows? b. What is the dollar value of Vox to Ace? c. Vox has 1.8 million common shares outstanding. What is the maximum price per share that Ace should offer for Vox? There are a lot of important assumptions in the above analysis. In one or two sentences each, list the two assumptions you believe are most important, explain why, and describe how you might sensitivity test these (you do not need to actually do the test)