Question
You work for a copier company and are trying to value a timber company as a potential acquisition target. Your companys asset beta is 1.2,
You work for a copier company and are trying to value a timber company as a potential acquisition target. Your companys asset beta is 1.2, while the asset beta of timber companies is 1.0. The risk free rate is 5% and the market risk premium is 7%. Which of the following statements is true:
The appropriate rate for discounting the timber companys free cash flows if you are using an APV analysis is 13.4%.
If you use a WACC valuation analysis because you expect to operate the timber company with a 30% leverage (D/V) ratio, you should expect the discount rate (WACC) that you use to be lower than 12%.
You expect to increase sales in your core copier business by 5% as a result of owning the timber company. You should apply a 12% discount rate to the incremental free cash flows related to these extra copier sales (assuming no debt is associated with these cash flows).
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