Glassmaker has pre-merger $5 in debt and $10 in equity. Rate on debt is 11%. The risk free rate is 6%. The tax rate is 40% . The levered beta is 1.36. The equity risk premium is 4%.
- What discount rate should you use to discount Glassmakers' free cash flows and interest tax savings?
10.01% 10.06% 11.29% 11.44% 13.49%
The owners of Arthouse Inc., a national artist supplies chain, are contemplating purchasing Craftworks Inc, a smaller chain. Arthouse's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Craftworks is 16%. Craftworks has 4 million shares outstanding and no debt. Craftworks' current price is $16.25.
- What is the maximum price per share that Arthouse should offer? $16.25 $16.97 $17.42 $18.13 $19.00