1. You have been given the job of evaluating the following merger candidate. You have collected the following cash flow for the acquisition candidate for the proposed merger (in millions):

Year 1 2 3 4 5__

Cash flows now for canidate 90 85 205 165 180

Additional cash flows with merger 60 90 100 225 250

Total cash flows with synergy 150 175 305 390 430

Risk free rate of return 3.0%

Beta for this project (the company after merging) 1.5

Market risk premium 5.5%

Pre-tax cost of debt 3.8%

Marginal tax rate 25%

Number of shares outstanding for the target company (millions) 85

Current market price per share for the target company $48

Percentage of the acquisition financed with debt 50%

Percentage of the acquisition financed with common equity 50%

What is the after tax cost of debt?

What is the after tax cost of common equity

What is the weighted average cost of capital for this acquisition candidate?

What is the maximum price per share you are willing to pay for this candidate?

Based on the numbers above, would you pursue this candidate?