Question: Coffee Inc. will acquire another firm. This will increase their FCF by $5 million at the end of the first year, and this contribution is

Coffee Inc. will acquire another firm. This will increase their FCF by $5 million at the end of the first year, and this contribution is expected to grow at a rate of 2.8% every year in perpetuity. Coffee currently maintains a debt-to-value ratio of 0.5, its marginal tax rate is 40%, its (before-tax) cost of debt is 6%, and rE is 10%. Coffee will maintain a constant debt-to-value ratio of 0.5. Thus use WACC method.

a. rU?

b. VU?

c. Assume the acquisition is financed with $62.5 million in new debt initially.

What is the PV of all the interest tax shields? Find the value using APV.

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a To find the unlevered cost of equity rU we need to first calculate the weighted average cost of capital WACC using the debttovalue ratio of 05 WACC ... View full answer

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