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1) Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Rose's free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 3% every year there after. Rose currently maintains a debt to equity ratio of 1, its marginal tax rate is 40%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition. The Free Cash Flow to Equity (FCFE) for the acquisition in year 0 is closest to:

A/ $5 million

B/ $100 million

C/ -$100 million

D/ -$50 million

2) Which of the following is NOT a step in the WACC valuation method?

A-Compute the value of the investment, including the tax benefit of leverage, by discounting the free cash flow of the investment using the WACC.

B-Compute the weighted average cost of capital.

C-Determine the free cash flow of the investment.

D-Adjust the WACC for the firm's current debt/equity ratio.

3)

Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Rose's free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 3% every year there after. Rose currently maintains a debt to equity ratio of 1, its marginal tax rate is 40%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition. The unlevered value of Rose's acquisition is closest to:

A/ $63 million

B/ $50 million

C/ $167 million

D/ $100 million

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