Use the Information for the Question(s)below

question 11

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 Free Cash Flow to Equity (FCFE) for the acquisition in year 0 is closest to:

• A)$5 million.
• B)$100 million.
• C)-$100 million.
• D)-$50 million.

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Definitions:

Corporate Structure

The organization of different departments or units within a company, defining roles, responsibilities, and authority levels.

Market Value

The estimated amount for which an asset or service would trade in the marketplace at a given time.

Promoter

A person who participates in the initial setting up of a corporation or who assists the corporation in making a public share offering.

Corporation

A legal entity that is separate and distinct from its owners, who are shareholders; corporations can own assets, incur liabilities, and conduct business.