SECTION B $-75$ marks

Instructions: This section consists of Three $(3)$ questions with marks as indicated. Please inswer all questions in the answer booklet provided. $($Suggested time: $90$ minutes$)$

Question $26(20$ marks$)$

Apilact$()$ Appliance Corporation is considering a merger with the Vaccaro Vacuum Company. Vaccaro is a publicly traded company, and its current beta is $1\mathrm{.}30.$ Vaccaro has been barely prolitable. so it has paid an average of only $20$ percent in taxes during the last several years. In addition. it uses little debt, having a debt ratio of just $25$ percent.

If the acquisition were made, Apilado would operate Vaccaro as a separate, wholly owned subsidiary. Apilado would pay taxes on a consolidated basis, and the tax rate would therefore increase to $35$ perceut. Apilado also would increase the debt capitalization in the Vaccaro subsidiary to $40$ percent of assets, which would increase its beta to $1\mathrm{.}47.$ Apilado's acquisition department estimates that Vaccaro, if acquired would produce the following Pre$-$tax cash flows in Apilado s shareholders:

$\backslash$table$[[$Year$,$Pre$-$tax Cash flows$],[1,$$$2,000,000$