Use the Information for the Question(s)below

question 66

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.
-The unlevered value of Rose's acquisition is closest to:

• A)$63 million.
• B)$50 million.
• C)$167 million.
• D)$100 million.

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Definitions:

Face Value

The nominal or dollar value printed on a security or bond, representing the amount that will be paid back at maturity, not including interest.

Coupon Rate

The interest rate a bond pays each year, shown as a percentage of its face value.

Yield To Maturity

The total return expected on a bond if it is held until the date it matures, including both interest payments and the difference between the bond's current market price and its face value.

Semi-Annually

Occurring or calculated twice a year, typically every six months.