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.

Answer rating: 100% (QA)

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 the full answer