Question 3. (20 points) Tundra Corporation is interested in acquiring Cantrell Corporation. Cantrell has 20 million shares outstanding and a target capital structure consisting of 30 percent debt and 70 percent equity. Cantrell's debt interest rate is 8 percent. Assume that the risk-free rate of interest is 2 percent and the market risk premium is 8 percent.

Cantrell's free cash flow (FCF0) is $8 million per year and is expected to grow at a constant rate of 6 percent a year; its beta is 1.1. Cantrell has $5 million in debt. The tax rate for both companies is 30 percent.

a. Calculate the required rate of return on equity using equation rs= rRF + RPM(b)

using equation: r_s= r_RF + RP_M(b₎

b. Calculate weighted average cost of capital, using equation: WACC = W_dr_d(1-%) + w_sr_s

c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g)

d. Calculate the value of the company's equity, using equation: Vs = Vops - debt

e. Calculate the current value of the company's stock, using equation:

Price per share = Vs/shares outstanding