Determining Discount Rates. You are the CEO of Pet Rock, Inc., and are considering moving from the pet rock business into fast food. Specifically, you are considering acquiring In-and-Out Burgers. Neither company has any debt. Your CFO claims that you should use Pet Rock's  of 1.5 to discount cash flows from In-and-Out Burgers while your Senior VP claims that you should use In-and-Out Burger's  of 0.8. Assume that the corporate tax rate is 0%. 

(a) Which  should you use when discounting cash flows from a fast food acquisition? Briefly state why. 

(b) Calculate the discount rate you should use, assuming that the rate on U.S. Treasury Bills is 2.0% and the market risk premium is 5.5%. 

(c) If In-and-Out Burger will cost you $100 million this year to acquire and then produce expected after-tax cash flows of $8 million per year for the next 100 years, should you buy In-and-Out Burger?

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Determining Discount Rates for Fast Food Acquisition a Discount Rate Selection Neither the CEOs choi... View the full answer