Discount glassmakers free cash flows-interest tax savings

Assignment Help Financial Management

Reference no: EM131530839

Exhibit 5 Best Window & Door Corporation is considering the acquisition of Glassmakers Inc. Glassmakers has a capital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. Glassmakers' pre-merger beta is 1.36. Best's beta is 1.02, and both it and Glassmakers face a 40% tax rate. Best's capital structure is 40% debt and 60% equity. The free cash flows from Glassmakers are estimated to be $3.0 million for each of the next 4 years and a horizon value of $10.0 million in Year 4. Tax savings are estimated to be $1 million for each of the next 4 years and a horizon value of $5 million in Year 4. New debt would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of 8%. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%. a.) Refer to Exhibit 5. What is Glassmakers' pre-merger WACC? b.)Refer to Exhibit 5. What discount rate should you use to discount Glassmakers' free cash flows and interest tax savings? c.)Refer to Exhibit 5. What is the value of Glassmakers' equity to Best? (Round your answer to the closest thousand dollars.)

Reference no: EM131530839

Questions Cloud

Bond with maturity-what is the yield to maturity of the bond : A bond with a maturity of 12 years sells for $1,047. If the coupon rate is 8.2 percent, what is the yield to maturity of the bond?

What is price of the bond : A bond with 25 years until maturity has a coupon rate of 7.2 percent and a yield to maturity of 6 percent. What is the price of the bond?

Use the marginal tax rates : Use the marginal tax rates in the table below to compute the tax owed in the following situation.

What it the npv of the proposed acquisition : Assume that all cash flows occur at the end of the year, Juicers must pay $90 million to acquire Fast Fruit. What it the NPV of the proposed acquisition?

Discount glassmakers free cash flows-interest tax savings : What discount rate should you use to discount Glassmakers' free cash flows and interest tax savings?

What is the pretax required return on gordon stock : What is the pretax required return on Gordon’s stock?

What is company weighted-average cost of capital : What is the company’s weighted-average cost of capital if the corporate tax rate is 35%?

Analyze this using euac measure and marr : Analyze this using an EUAC measure and a MARR of 15% to see if the concrete mixer should be replaced if the old mixer is sold for its market value of $65,000.

A long-term unsecured corporate bond : A long-term unsecured corporate bond, a loan which requires no assets as collateral, a method of retiring bonds in an orderly process over the life of the bond.

User Account

All Pages