In 1985, General Motors was evaluating the acquisition of Hughes Aircraft Corporation, and assumed that Hughes was of approximately the same risk as Lockheed and Northrop. Given the following information in the table, and also assuming that cash flows are perpetual, compute the value of Hughes using the WACC approach:
Firm βE D/E
GM 1.20 0.40
Lockheed 0.90 0.90
Northrop 0.85 0.70
Target D/E for acquisition of Hughes = 1
Hughes's expected unlevered cash flow next year = $300 million
Growth rate of cash flows for Hughes = 5% per year
Tc = 34%
Appropriate discount rate on debt: Rf = 8%
Expected return on the market portfolio: E(Rm)=14%