What is the value of glassmakers equity to best

Assignment Help Financial Management

Reference no: EM131537336

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: EM131537336

Questions Cloud

Annual incentive fee according to the black-scholes formula : What is the value of the annual incentive fee according to the Black-Scholes formula?

Discuss the impacts of urban renewal on the availability : Discuss the impacts of urban renewal on the availability of housing and urban sprawl .

Post the general columns of the cash payment journal : Journalizing buying plant assets and paying property tax The cash payments journal and selected general ledger accounts for Umeki Food Source.

Statements best defines the efficient market hypothesis : Which one of the following statements best defines the efficient market hypothesis?

What is the value of glassmakers equity to best : What discount rate should you use to discount Glassmakers' free cash flows and interest tax savings? What is the value of Glassmakers' equity to Best?

What is the present worth of mission : What is the present worth of Mission Y?

How does the floor-plan method benefit customers : Fender Guitars Are Everywhere When you enter a music store searching for that perfect guitar, you expect to be able to choose from an extensive variety.

Explain the reasoning behind the u-shaped and long-run : Explain the reasoning behind the U-shaped, long-run, average cost curve. Explain the law of diminishing marginal returns.

What influence do conformity have on human behavior : What influence do Conformity and groupthink have on human behavior? How can the skills we learn in this course overcome these challenges?

User Account

All Pages