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Best Window & Door Corporation is considering the acquisition of Glassmakers Inc. Glassmakers has a capital...

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Finance

Best Window & Door Corporation is considering theacquisition of Glassmakers Inc. Glassmakers has a capital structureconsisting of $5 million (market value) of 11% bonds and $10million (market value) of common stock. Glassmakers' pre-mergerbeta is 1.36. Best's beta is 1.02, and both it and Glassmakers facea 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 millionfor each of the next 4 years and a horizon value of $5 million inYear 4. New debt would be issued to finance the acquisition andretire the old debt, and this new debt would have an interest rateof 8%. Currently, the risk-free rate is 6.0% and the market riskpremium is 4.0%.

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