Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Rose’s free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 3% every year thereafter. Rose currently maintains a debt to equity ratio of 1, its marginal tax rate is 40%, its cost of debt is 10%, and its cost of equity is 14%. Rose Industries will maintain a constant debt-equity ratio for the acquisition.

(a). Compute Rose’s unlevered cost of capital.

 Rose's unlevered cost of capital is __________ % (round to one decimal place)

 (b). Compute the unlevered value of Rose’s acquisition.

The unlevered value of Rose's aquisition is $________  million (round to the nearest number)

 (c). Given that Rose issues new debt of $50 million initially to fund the acquisition, compute the present value of the interest tax shield for this acquisition.

The present value of the interest tax shield for the acquisition is $ __________ million (round to the nearest number)

 (d). Given that Rose issues new debt of $50 million initially to fund the acquisition, compute the total value of this acquisition using the APV method.

Hint: Make sure to round all intermediate calculations to at least five decimal places

The total value of the  aquisition using the APV method is $ ________ million (round to the nearest number)

Answer rating: 100% (QA)

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