PROBLEM #2. Halifax Partners, a leveraged buyout firm, is considering an investment in a national retail bookseller. The target is attractive to Halifax because of its low level of debt, which at present makes up just 9.5% of the company's total capital. The partners at Halifax believe that the debt level can be raised to as much as 30% of capital. Although this might mean a lowering of the credit rating from to BBB, the Halifax partners believe that the interest tax shields would more than offset higher costs of borrowing. The bookseller's average beta for the past year has been 0.98, and its marginal tax rate is 35%. a. How would the beta change if Halifax completed the acquisition and raised the bookseller's debt to 30%? Assume a zero debt beta. b. Assume that the new debt level will total $1170 million at an interest rate of 6% and that this debt will be the perpetual amount of debt of the firm. Calculate the equity value of the bookseller to Halifax using the adjusted present value approach. ($MM) Year 1 Year 2 Year 3 Year 4 Year S Sales 3,271.2 3.387.9 3.537.4 3,777.5 3,966.4 EBIT 171.4 191 9 210.3 235.9 238.0 Depreciation and amortization 83.5 95.3 96.2 103.0 112.0 Changes in working capital (32.7) (37.3) (17.7) (41.6) (39.7) Capital expenditures [159.2) (141.2) (90.7) (100.0) (120.0) Risk-from rate 03 Risk premium .05 Terminal value growth rate 39% Shares outstanding 75 million Tax rate 35%