Use the Information for the Question(s)below

question 28

Multiple Choice

Use the information for the question(s) below.
Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million.The acquisition is expected to increase Rose's free cash flow by $5 million the first year,and this contribution is expected to grow at a rate of 3% every year thereafter.Rose currently maintains a debt to equity ratio of 1,its corporate tax rate is 21%,its cost of debt rD is 6%,and its cost of equity rE is 10%.Rose Industries will maintain a constant debt-equity ratio for the acquisition.
-Given that Rose issues new debt of $50 million initially to fund the acquisition,the present value of the interest tax shield for this acquisition is closest to:

• A)$24 million.
• B)$50 million.
• C)$20 million.
• D)$15 million.

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Definitions:

Annelids

A phylum of invertebrate worms known for their segmented bodies, such as earthworms and leeches.

Specialized

Adapted or suited for a specific purpose or function.

Nauplius Larva

A nauplius larva is the first larval stage of many crustaceans, characterized by its simple structure and three pairs of appendages.

Crustaceans

Members of a subphylum that includes lobsters, crabs, shrimp, barnacles, and their relatives.