Sama’s Superb Strings (3S) is mulling a takeover of Vu’s Victorious Violins (3V) by purchasing the firm’s equity. 3S has come up with the following sales estimates for 3V (all numbers in millions of dollars). Year Sales 2023 4000 2024 5000 2025 6000 The cost of goods sold expense is estimated to be 60% of sales. Depreciation is expected to be 5% of sales. Selling, general and administrative expenses (including interest expense) should be 10% of sales. 3V’s tax rate is 20%. The firm is expected to grow at 3% per year after 2025. Assume the acquisition is to take place on January 1, 2023 and that all cash flows occur at the end of the year. 3S’s beta is 1.10 while 3V’s beta is 1.20. The respective firms’ betas are expected to remain unchanged if the acquisition goes through. 3V is not expected to purchase any fixed assets until 2025, at which point capital expenditures are forecast to equal depreciation expenses for the foreseeable future. The T-bond yield is 2% and the market risk premium is 8%.

(a) Find the correct discount rate for valuing the takeover.

(b) Find the value of 3V’s equity to 3S. (c) Find 3V’s terminal value.