Suppose Chittenden is considering the acquisition of another firm in its industry. The acquisition is expected to increase Chittendens free cash flow by $5 million the first year and this contribution is expected to grow at a rate of 4% per year from then on. The acquisition cost of $110 million will be financed with $95.24 million in new debt initially. Assume the companys cost of equity is 12.3%, its cost of debt is 8.5%, its tax rate is 40% and Chittenden will maintain its debt-equity ratio of 2. Suppose you are hired to value this acquisition using APV and FTE methods.

1. You know because the value of the acquisition is expected to grow by 4% per year, the amount of debt the acquisition supportsand, therefore, the interest tax shield is expected to grow at the same rate. Therefore, the present value of the interest tax shield in million dollars is:

2. Finally, the value of the acquisition with leverage given by the APV in million dollars is: (Hint: you need to add on the PV of tax-shield to unlevered value of acquisition you calculated before)