Problem 2: (20 points) Teslot is an electric producer of motorbikes. Teslet has a market value of $5B and excess cash reserves of $2B and no debt. (Note: The total market value $SB includes the $2B excess cash reserves.) As a firm (ie.. including the cash-reserves.) TesLot beta is 0.8. Assume that the risk-free rate is 3%, that any debt considered in this question is risk free and that the market risk premium is 5%. TesLot is considering acquiring Harley Son, which is a leading manufacturing of gasoline motorbikes. Harley Son has a $75 FCF next year that is growing at 3% perpetually afterwards. The asset beta of traditional motorbikes producers is 0.9. b) (10 points) Ignore corporate taxes (i.e., assume t=0%). Suppose that TesLot acquires HarleySon at the amount that you find in a) and uses as much as needed of the excess cash that Tes Lot has in its balance sheet to do so. Calculate TesLot WACC before and after making the HarleySon acquisition. Does it change? Explain. Note: The way the acquisition works is as follows. TesLot pays the amount that you find in a) then it receives all the assets of HarleySon and assumes all its debt. That is, after the acquisition TesLor has all the assets and liabilities of HarleySon in its balance sheet. Assume that there is no operating synergies between TesLot and Harley Son, i.e., that their operations are not affected by the merger. Problem 2: (20 points) Teslot is an electric producer of motorbikes. Teslet has a market value of $5B and excess cash reserves of $2B and no debt. (Note: The total market value $SB includes the $2B excess cash reserves.) As a firm (ie.. including the cash-reserves.) TesLot beta is 0.8. Assume that the risk-free rate is 3%, that any debt considered in this question is risk free and that the market risk premium is 5%. TesLot is considering acquiring Harley Son, which is a leading manufacturing of gasoline motorbikes. Harley Son has a $75 FCF next year that is growing at 3% perpetually afterwards. The asset beta of traditional motorbikes producers is 0.9. b) (10 points) Ignore corporate taxes (i.e., assume t=0%). Suppose that TesLot acquires HarleySon at the amount that you find in a) and uses as much as needed of the excess cash that Tes Lot has in its balance sheet to do so. Calculate TesLot WACC before and after making the HarleySon acquisition. Does it change? Explain. Note: The way the acquisition works is as follows. TesLot pays the amount that you find in a) then it receives all the assets of HarleySon and assumes all its debt. That is, after the acquisition TesLor has all the assets and liabilities of HarleySon in its balance sheet. Assume that there is no operating synergies between TesLot and Harley Son, i.e., that their operations are not affected by the merger
