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The private equity firm Ole Miss Pvt. Equity is acquiring Alabama, Inc. This acquisition will contribute $3.8 million in free cash flows the first year, which will grow by 3% per year thereafter. The PE firm will finance the acquisition with $50 million initially in new debt (borrowed at 6% interest rate annually) and $30 million in equity. The negotiated price to be paid is $80 million. Compute the value of the acquisition using the APV method, assuming that Alabama Inc. will maintain a constant debt-equity ratio for the acquisition. It is given that Alabama Inc.'s unlevered cost of capital, ru = 8%; the interest tax shields can be discounted at the rate of r = 8%; and corporate tax rate is 40%. Is it a positive NPV project? Also, compute the value if the corporate tax rate is 21%. Is it still a positive NPV project? (Hint: Since the value of the acquisition is expected to grow by 3% per year, the amount of debt the acquisition supports, and therefore, the interest tax shield can be expected to grow at the same rate.) The private equity firm Ole Miss Pvt. Equity is acquiring Alabama, Inc. This acquisition will contribute $3.8 million in free cash flows the first year, which will grow by 3% per year thereafter. The PE firm will finance the acquisition with $50 million initially in new debt (borrowed at 6% interest rate annually) and $30 million in equity. The negotiated price to be paid is $80 million. Compute the value of the acquisition using the APV method, assuming that Alabama Inc. will maintain a constant debt-equity ratio for the acquisition. It is given that Alabama Inc.'s unlevered cost of capital, ru = 8%; the interest tax shields can be discounted at the rate of r = 8%; and corporate tax rate is 40%. Is it a positive NPV project? Also, compute the value if the corporate tax rate is 21%. Is it still a positive NPV project? (Hint: Since the value of the acquisition is expected to grow by 3% per year, the amount of debt the acquisition supports, and therefore, the interest tax shield can be expected to grow at the same rate.)

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