x was evaluating the acquisition of y, and assumed that y was of approximately the same risk as L and N. Given the following information in the table, and also assuming that cash flows are perpetual, compute the value of y using the WACC approach: Firm βE D/E x 1.20 0.40 L 0.90 0.90 N 0.85 0.70 Target D/E for acquisition of y = 1 y’s expected unlevered cash flow next year = $300 million Growth rate of cash flows for y= 5% per year Tc = 34% Discount rate on debt 8% e(Rm)14%

Question

x was evaluating the acquisition of y, and assumed that y was of approximately the same risk as L and N. Given the following information in the table, and also assuming that cash flows are perpetual, compute the value of y using the WACC approach:  Firm βE D/E  x 1.20 0.40  L 0.90 0.90  N 0.85 0.70  Target D/E for acquisition of y = 1  y’s expected unlevered cash flow next year = $300 million Growth rate of cash flows for  y= 5% per year Tc = 34% Discount rate on debt 8%  e(Rm)14%