First question $(35\%).$ Free Cash Flow valuation. Please compute the net present

value $($NPV$)$ of the acquisition.

The Alfa Corporation is viewed as a possible takeover target by Beta, Inc. Currently Alfa

uses $25$ percent debt in its capital structure, but $$ plans to increase the debt ratio to $50$

percent if the acquisition is consummated. After$-$tax cost of debt capital for Alfa is estimated

to be $15$ percent, which holds constant under either capital structure. The cost of equity of

Alfa after acquisition is expected to be $25$ percent. The current market value of Alfa's

outstanding debt is $$12$ million, all of which will be assumed by Beta. Beta intends to pay

$$25$ million in cash and common stock for all Alfa's stock in addition to assuming all Alfa's

debt. Currently, the market price of Alfa's common stock is $$20$ million.

Selected items from Alfa's financial data are as follows:

In addition, the cost of goods sold $($C$.$O$.$G$.$S$.)$ runs $70$ percent of sales and the marginal tax

rate is $34$ percent.