PROBLEM 8
Healthinfo Corporation is considering the acquisition of MDWeb Company. MDWeb has a capital
structure consisting of $5 million (market value) of 11 percent bonds and $10 million (market value) of
common stock. MDWeb's premerger beta is 1.36. Healthinfo's beta is 1.02, and both it and MDWeb
face a 40 percent tax rate. Healthinfo's capital structure is 40 percent debt and 60 percent equity. The
free operating cash flows from MDWeb are estimated to be $4.0 million for each of the next four years
and a terminal value of $15.0 million in Year 4. Currently, the risk-free rate is 6.0 percent, and the
market risk premium is 4.0 percent. What is the value of MDWebs equity to Healthinfo?