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. Bests beta is 1.02, and both it and Glassmakers face a 40% tax rate. Bests 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. What is Glassmakers pre-merger WACC? b. What discount rate should you use to discount Glassmakers free cash flows and interest tax savings? c. What is the value of Glassmakers equity to Best?
Best Window & Door Corporation is considering the acquisition of Glass
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. Bests beta is 1.02, and both it and Glassmakers face a 40% tax rate. Bests 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. What is Glassmakers pre-merger WACC? b. What discount rate should you use to discount Glassmakers free cash flows and interest tax savings? c. What is the value of Glassmakers equity to Best?
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