ABC Corporation is considering the acquisition of XYZ, Inc. XYZ, Inc has a capital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. XYZ’s pre-merger beta is 1.36. ABC’s beta is 1.02, and both it and XYZ’s face a 40% tax rate. ABC's capital structure is 40% debt and 60% equity. The free cash flows from XYZ 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%.
Based on the information above, please answer the following questions, show all work to solve for the answers:
What is XYZ’s pre-merger WACC?
What is the post merger value of operations? Note: You must 1st solve for unlevered value of the operation and then the value of the interest tax shield.