Problem 10

Travel Corp. has a WACC of 12% and wants to buy Pink Umbrella, which has a WACC of 19%, for $29 million.

Pink Umbrella is expected to generate a cash flow from assets of $3 million next year, which will then grow by 3% per year forever.

Part 1 What discount rate should Travel Corp. use to valuate Pink Umbrella?

Part 2 What is the NPV of the acquisition (in $ million)?