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?

Glass