Apilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Co
ID: 2694504 • Letter: A
Question
Apilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Company. Vaccaro is a publicly traded company, and its current beta is 1.30. Vaccaro has been barely profitable, so it has paid an average of only 15% in taxes during the last several years. In addition, it uses little debt, having a debt ratio of just 30%.
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 50% of assets, which would increase its beta to 1.57. 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 13%, its beta is 1.0, and its cost of debt is 9%. The risk-free rate is 8%.
Year Net Cash Flows 1 $1.30 2 $1.50 3 $1.75 4 $2.00 5 and beyond Constant growth at 8%Explanation / Answer
discuss what else Sephora could do to improve its supply channel management. Provide specific examples to support your response.
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