Question 4 (15 Marks] Apilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Company Vaccaro is a publicly traded company, and its current beta is 1 30 Vaccaro has been barely profitable, so it has paid an average of only 20% in taxes during the last several years In addition, it uses little debt, having a debt ratio of just 25% If the acquisition were made, Apilado would operate Vaccaro as a separate, wholly owned subsidiary Apilado would pay taxes on a consolidated basis, and the tax rate would, therefore, increase to 35% Apilado also would increase the debt capitalisation in the Vaccaro subsidiary to 40% of assets, which would increase its beta to 147 Apilado's acquisition department estimates that Vaccaro, If acquired, would produce the following cash flows to Apilado's shareholders (in millions of rands) Year Cash Flows R1 30 R1 50 R1 75 R200 Constant growth at 6% 5 and beyond These cash flows include all acquisition effects Apilado's cost of equity is 14%, its beta is 10, and its cost of debt is 10% The risk-free rate is 8% Required: 41 What discount rate should be used to discount the estimated cash flows? (Hint Use Apilado's (5) rs to determine the market nisk premium) What is the rand value of Vaccaro to Apilado? 42 43 Vaccaro has 1 2 million common shares outstanding What is the maximum price per share that Apilado should offer for Vaccaro? If the tender offer is accepted at this price, what will happen to Apilado's share price? (6) Question 4 (15 Marks] Apilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Company Vaccaro is a publicly traded company, and its current beta is 1 30 Vaccaro has been barely profitable, so it has paid an average of only 20% in taxes during the last several years In addition, it uses little debt, having a debt ratio of just 25% If the acquisition were made, Apilado would operate Vaccaro as a separate, wholly owned subsidiary Apilado would pay taxes on a consolidated basis, and the tax rate would, therefore, increase to 35% Apilado also would increase the debt capitalisation in the Vaccaro subsidiary to 40% of assets, which would increase its beta to 147 Apilado's acquisition department estimates that Vaccaro, If acquired, would produce the following cash flows to Apilado's shareholders (in millions of rands) Year Cash Flows R1 30 R1 50 R1 75 R200 Constant growth at 6% 5 and beyond These cash flows include all acquisition effects Apilado's cost of equity is 14%, its beta is 10, and its cost of debt is 10% The risk-free rate is 8% Required: 41 What discount rate should be used to discount the estimated cash flows? (Hint Use Apilado's (5) rs to determine the market nisk premium) What is the rand value of Vaccaro to Apilado? 42 43 Vaccaro has 1 2 million common shares outstanding What is the maximum price per share that Apilado should offer for Vaccaro? If the tender offer is accepted at this price, what will happen to Apilado's share price? (6)