Company A is a publicly trading firm and wants to acquire company B (company B is not in the same line of business and is a private firm). Company A has 80,000 shares outstanding and Company C, a publicly trading firm in the same line of business as Company B, has 35,000 shares outstanding and an equity beta of 1.8. Target debt-to-value ratio of Company B is 15% and long term debt to equity ratio of Company C is 0.75. Tax rate of all companies is 40% and Company B's borrowing rate is 6.3%. Risk-free rate is 2% and market risk premium is 6.5%.

Q1: What discount rate should be used to value Company B?

Q2: If you had a market value of equity of $8M for Company B, what is max share price that Company A should offer Company B?

Answer rating: 100% (QA)

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