Your firm, Cambridge Entertainment (CE), has two distinct operating divisions. The first division, which represents 60% of market value, is a traditional publishing company (magazines, books, etc.). The second division, which represents 40% of market value, owns a large collection of TV and radio stations broadly dispersed around the U.S. Your boss asks you to evaluate the firm’s cost of capital. You have collected the following information about the firm and its main competitors: The tax rate is 40%, the Tbill rate is 6%, and the market risk premium is 5%. 

(a) If the CAPM is accurate, what is Cambridge Entertainment’s after-tax WACC? 

(b) CE has the opportunity to buy a small publishing company. The acquisition is expected to generate cashflows of $12 million in the first year, with annual growth of 4%. CE will finance the acquisition entirely with equity, but the deal will have a negligible effect on the firm’s overall capital structure (D/V will remain at 25%). How much should CE be willing to pay for the acquisition?

Answer rating: 100% (QA)

aTo find aftertax WACC of Cambridge Entertainment Cost of equ... View the full answer