Apilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Co

Question

Apilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Company. Vaccaro is a publicly traded company, and its current beta is 1.20. Vaccaro has been barely profitable, so it has paid an average of only 25% in taxes during the last several years. In addition, it uses little debt, having a debt ratio of just 20%.

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%. Apilado also would increase the debt capitalization in the Vaccaro subsidiary to 40% of assets, which would increase its beta to 1.55. Apilado's acquisition department estimates that Vaccaro, if acquired, would produce the following net cash flows to Apilado's shareholders (in millions of dollars):

These cash flows include all acquisition effects. Apilado's cost of equity is 14%, its beta is 1.0, and its cost of debt is 10%. The risk-free rate is 7%.

What discount rate should be used to discount the estimated cash flows? (Hint: Use Apilado's rs to determine the market risk premium.)
Round your answer to two decimal places.
   % (I got 17.85 for this)

What is the dollar value of Vaccaro to Apilado? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,000,000 should be entered as 13.
$    million

Vaccaro has 1.3 million common shares outstanding. What is the maximum price per share that Apilado should offer for Vaccaro? Round your answer to the nearest cent.
$   

I NEED HELP WITH PART B PLEASE! EXPLAIN HOW YOU ARE GETTING YOUR ANSWER! THANKS SO MUCH!

Explanation / Answer

the discount rate should be 15.384 and it is increasing in a proportionate way.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.