FINANCE 300 : Lec. 13-20 (Ch. 8-13) 4/7

Last Year's Dividend (Do) $2.80

Growth rate for year 1 (g1) 25%

Growth rate for year 2 (g2) 18%

Constant growth rate year 3 on (g3) 8%

Required Rate of Return 13%

Dividend in Year 1 (D1) =

Dividend in Year 2 (D2) =

Dividend in Year 3 (D3) =

Price in Period 2 =

Discount back to today

CF0 =

CF1 =

CF2 =

I/YR =

Current Estimated Value (Po) =

If the stock was currently selling for $50, would you buy it?yes or no?

Exhibit 5 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%.

What is Glassmakers' pre-merger WACC?

What discount rate should you use to discount Glassmakers' free cash flows and interest tax savings?

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

Mostly, I need answers for the second and third Qs, detailed please

Exhibit 5 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%. a.) Refer to Exhibit 5. What is Glassmakers' pre-merger WACC? b.)Refer to Exhibit 5. What discount rate should you use to discount Glassmakers' free cash flows and interest tax savings? c.)Refer to Exhibit 5. What is the value of Glassmakers' equity to Best? (Round your answer to the closest thousand dollars.)