Problem 8-22 (Answers A and B are correct, I cannot figure out C and D)

A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying.

The target companys equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the targets cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows.

	($ millions)
Year	1	2	3	4	5
Free cash flows	$35	$50	$55	$60	$	60
Selling price					$	720
Total free cash flows	$35	$50	$55	$60	$	780

To finance the purchase, the investors have negotiated a $500 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk premium 5 percent

Selected Additional Information
Tax rate	40	percent
Risk-free interest rate	3	percent
Market risk premium	5	percent

a. Estimate the target firms asset beta. (Round your answer to 2 decimal places.)

Target firm's asset beta

0.48

This answer is correct.

b. Estimate the targets unlevered, or all-equity, cost of capital (K_A). (Round your answer to 1 decimal place.)

Target's unlevered, or all-equity, cost of capital (KA)

5.4

%

This Answer is correct.

c. Estimate the targets all-equity present value. (Enter your answer in millions rounded to 2 decimal places.)

Target's all-equity present value

million

d. Estimate the present value of the interest tax shields on the acquisition debt discounted at K_A. (Round intermediate calculations to 1 decimal place. Enter your answer in millions rounded to 2 decimal places.)

Present value

million