Gordon Investments Inv. (a private equity firm) is considering the acquisition of Raider Blowers Inc. Raider Blowers has a capital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. Raider Blowers’ pre-merger beta is 1.36. Best's beta is 1.02, and both it and Raider Blowers face a 40% tax rate. Best's capital structure is 40% debt and 60% equity. The free cash flows from Raider Blowers 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 million for each of the next 4 years and a horizon value of $5 million in Year 4. New debt would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of 8%. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.
a. What is Raider Blowers’ pre-merger WACC?
b. What discount rate should you use to discount Raider Blowers’ free cash flows and interest tax savings?
c. What is the value of Raider Blowers’ equity to Best? (Round your answer to the closest thousand dollars.