1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
nirvana33 [79]
3 years ago
9

Great Subs Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently finance

d using 20% debt at a cost of 8%. Great Subs’ analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.) The acquisition would be made immediately, if it is to be undertaken. Eastern's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%.
Required:
What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?
Business
1 answer:
tatuchka [14]3 years ago
3 0

Answer:

WACC 13.85600%

Explanation:

First we calculate Eastern Pizza CAPM:

Ke= r_f + \beta (r_m-r_f)

risk free = 0.08

market rate = 0.12

premium market = (market rate - risk free) 0.04

beta(non diversifiable risk) = 2

Ke= 0.08 + 2 (0.04)

Ke 0.16000

Then we solve for WACC

WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})

Ke 0.16000

Equity weight 0.8

Kd 0.08

Debt Weight 0.2

t 0.34

WACC = 0.16(0.8) + 0.08(1-0.34)(0.2)

WACC 13.85600%

The company will use the data on eastern Pizza to evualuate project presented to it. Also, it will  consider the new tax rate to determinate the tax shield.

You might be interested in
Gomez Corp. uses the allowance method to account for uncollectibles. On January 31, it wrote off an $800 account of a customer,
saul85 [17]

Answer:

Explanation:

The journal entries are shown below:

On January 31

Allowance for doubtful accounts A/c Dr $800

         To Account receivable A/c $800

(Being the written off amount is recorded)

On January 31

Account receivable A/c Dr $300

           To Allowance for doubtful accounts A/c $300

(Being the reverse entry is made)

On March 9

Cash A/c Dr $300

      To Accounts receivable A/c $300

(Being the amount is collected)

7 0
3 years ago
________ examines organizational units for efficiency, effectiveness, and adequate controls.
mel-nik [20]
Currently, I would say LEAN and Six Sigma.
8 0
3 years ago
When choosing which foreign country to enter, a country will be less appealing when?
Gennadij [26K]
It is/was at war, it doesn't have the kind of financial sustenance you need.
3 0
3 years ago
A simple supply curve shows that an increase in the price of a good will cause the quantity supplied to:
Sati [7]

Answer:

This question is incomplete, the options are missing. The options are the following:

a) Decrease.

b) Increase.

c) Remain constant.

d) Fluctuate randomly around its equilibrium value.

And the correct answer is the option B: Increase.

Explanation:

To begin with, in the microeconomics theory the supply curve is known for being the one who shows what quantity will be supplied by the offerents given a particular amount of price that is already establish by the interaction between the forces of the market given a perfect competitive market as an example. So in that graphic the supply curve will always have a positive slope and that is due to the law of supply that establishes that there is a direct relationship between the price a good and its supply, so that means that if the price a good increases its quantity supplied will increase as well with it.

5 0
3 years ago
Why is it important to know how money and emotions affect each<br> other?
Snezhnost [94]
Thinking about money for some of us (including myself) creates very emotional responses. Some emotions are happiness, sadness, guilt, fear and many others. You've heard the saying "money doesn't buy happiness", but what it does buy is a trip to Hawaii for myself and a college education for my daughter. For me, that's a great happiness start. Since this is not the emotion I usually have around money I knew that it was time to do something about it. As an entrepreneur, it becomes a vicious cycle of being happy when I have money and being not happy when I don't. In between those two emotions also live guilt, fear, frustration and sometimes anger. It's time for me to change my conscious shift when it comes to money, but where do I start? I sat down with Holly Signorelli who has always had wonderful and enlightening tips on this subject. Here is our conversation (and some great tips) on how to balance your emotions regarding money
8 0
2 years ago
Other questions:
  • Ceres corporation acquired a mineral mine for $6,000,000 of which $600,000 was ascribed to land value after the mineral has been
    6·2 answers
  • Philo T. Farmsworth is a corn farmer with a 40-acre tract of land. Each acre can produce 100 bushels of corn. The cost of planti
    5·1 answer
  • Kimberly has been helping Jonah in preparing his personal income tax forms for a couple of years. Jonah's boss recommended Kimbe
    14·1 answer
  • If you spend 8.50 for lunch on Monday 3.95 on Tuesday and 11.15 on Friday how much have you spent for lunch this week
    15·2 answers
  • An expansionary monetary policy affects aggregate demand
    7·1 answer
  • In order to compare and evaluate choices, there must be a set of
    10·1 answer
  • Debit CreditCash $2,870 Accounts Receivable $3,231 Supplies 800 Equipment 3,800 Accounts Payable 2,666 Unearned Service Revenue
    12·1 answer
  • Old Economy Traders opened an account to short-sell 1,900 shares of Internet Dreams at $58 per share. The initial margin require
    5·1 answer
  • Suppose a firm has 35 million shares of common stock outstanding at a price of $15 per share. The firm also has 200,000 bonds ou
    8·1 answer
  • Create a financial plan outlining a clear, financial overview for your business of choice. This can be based on a business you w
    13·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!