Best Window & Door Corporation is considering the acquisition of Glassmakers Inc

Question

Best Window & Door Corporation is considering the acquisition of Glassmakers Inc. Glassmakers has a capital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. Glassmakers' pre-merger beta is 1.36. Best's beta is 1.02, and both it and Glassmakers face a 40% tax rate. Best's capital structure is 40% debt and 60% equity. The free cash flows from Glassmakers are estimated to be $3.0 million for each of the next 4 years and a horizon value of $10.0 million in Year 4. Tax savings are estimated to be $1 million for each of the next 4 years and a horizon value of $5 million in Year 4. New debt would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of 8%. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.

Refer to Exhibit 26.1. What is the value of Glassmakers' equity to Best? (Round your answer to the closest thousand dollars.)

$16,019,000

$17,111,000

$18,916,000

$22,111,000

$22,916,000

Explanation / Answer

Answer: $17,111,000

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