Magiclean Corporation Is Considering the Acquisition of Dustvac Company

question 14

Multiple Choice

Magiclean Corporation is considering the acquisition of Dustvac Company. Dustvac has a capital structure consisting of $5 million (market value) of 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% 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 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%.
-What Dustvac's pre-merger WACC?

• A) 9.02%
• B) 9.50%
• C) 9.83%
• D) 10.01%
• E) 11.29%

---

Definitions:

Clinical Trials Research

The systematic study designed to evaluate the effects and safety of medications or medical devices by monitoring their outcomes on large groups of people.

Solution-Focused Therapy

A brief therapeutic approach focusing on finding solutions in the present time and exploring one’s hope for the future to find quicker resolutions of one’s problems.

Exception-Finding Questions

Therapeutic questions designed to help individuals identify and examine instances where their problem does not occur, challenging negative generalizations.

Scaling Questions

A technique used in solution-focused therapy to help clients rate their feelings, behaviors, or perceptions on a scale, facilitating awareness and goal setting.