An automobile manufacturer evaluates the acquisition of an aircraft manufacturing firm (target firm). Two comparable firms,...

 

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An automobile manufacturer evaluates the acquisition of an aircraft manufacturing firm (target firm). Two comparable firms, Airtaxi and Going, are identified. Consider the following inputs: Airtaxi: Equity beta BE = 0.8 and debt-to-equity ratio D/E = 0.9 Going: BE 0.6 and D/E = 0.7 - • D/E for the target firm = 0 Target firm's expected cash flow next year = 100 million Growth rate of target firm's cash flow 5% per annum . All debts are risk-free with discount rates 7% per annum • Market risk premium is 15% per annum, and CAPM holds Respond to (a) through (d). (a) Compute the asset betas of Airtaxi and Going. (b) Compute the asset beta and the cost of capital of the target firm (c) Compute the value of the target firm? = An automobile manufacturer evaluates the acquisition of an aircraft manufacturing firm (target firm). Two comparable firms, Airtaxi and Going, are identified. Consider the following inputs: Airtaxi: Equity beta BE = 0.8 and debt-to-equity ratio D/E = 0.9 Going: BE 0.6 and D/E = 0.7 - • D/E for the target firm = 0 Target firm's expected cash flow next year = 100 million Growth rate of target firm's cash flow 5% per annum . All debts are risk-free with discount rates 7% per annum • Market risk premium is 15% per annum, and CAPM holds Respond to (a) through (d). (a) Compute the asset betas of Airtaxi and Going. (b) Compute the asset beta and the cost of capital of the target firm (c) Compute the value of the target firm? =

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a Asset Beta Concept Unlevered beta also called asset beta represents the systematic risk ... View the full answer