M&A. For this and the next 2 questions: Magiclean Corporation is considering an acquisition of Dustvac Company. Dustvac has a capital structure consisting of $5 million (market value) in 11% bonds and $10 million (market value) of common stock. Dustvac’s pre-merger beta is 1.36. Magiclean’s beta is 1.02 and both it and Dustvac face a 40 percent tax rate. Magiclean’s capital structure is 40% debt and 60% equity. The free cash flows from Dustvac are estimated to be $3.0 million for each of the next four 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. Additionally, 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% and the market risk premium is 4%.What is the value of Dustvac’s equity to Magiclean? Note that there are no non-operating assets to consider.
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