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%

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Definitions:

Tolerances

The permissible limits of variation in a physical dimension, material condition, or other measurable characteristic.

Materials

Substances or components that are used in the manufacturing process to create products.

Route Sheet

A document detailing the operations, materials, and sequence of work required to manufacture a part or assembly, guiding the production process.

Sequence of Operations

The specific order in which tasks or activities must be carried out to complete a process or manufacture a product efficiently.