Question
Suppose that Ret is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Rets free cash
Suppose that Ret is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Rets free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 3% every year thereafter. Ret currently maintains a debt to equity ratio of 1, its corporate tax rate is 21%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Ret will maintain a constant debt-equity ratio for the acquisition. The Free Cash Flow-to-Equity (FCFE) for the acquisition in year 1 is closest to _______.
A. $6.5 million B. $6.8 million C. $4.1 million D. $8.3 million
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