Given that Rose issues new debt of $50 million initially to fund the acquisition,the total value of this acquisition using the APV method is closest to:
A)$100 million
B)$120 million
C)$124 million
D)$115 million

Question

Quizplus · Accepted Answer

C)r_unlevered = 11ea7cce_3ca5_6259_928c_65c6e3b561bd_TB1626_11 r_E + 11ea7cce_3ca5_625a_928c_45cba8accb6b_TB1626_11 r_D(1 - τ_c),where D = net debt = Debt - Cash r_unlevered = 11ea7cce_3ca5_896b_928c_b949c56b8cb4_TB1626_11 (.10)+ 11ea7cce_3ca5_896c_928c_3178e0dc20be_TB1626_11 (.06)= .08 V^U = 11ea7cce_3ca5_896d_928c_f375863a9ed5_TB1626_11 = $100 million Interest tax shield in first year = $50(.06)(.40)= $1.2 million PV(tax shield)= 11ea7cce_3ca5_b07e_928c_d30f89259b6a_TB1626_11 = $24 million V^L = V^U + PV(interest tax shield)= $100 million + $24 million = $124 million

Given That Rose Issues New Debt of $50 Million Initially