3.7. Eden Autos has = 1.5. It is interested in buying Attlee Tires which has = 1

Question

3.7. Eden Autos has = 1.5. It is interested in buying Attlee Tires which has = 1.1. Eden believes that after the acquisition, its will become 1.4. The expected after-tax earnings from Attlee will be $23 million for the first year, but this figure will continue to increase by 5% per year in future. The expected return on the market is 13%, and the riskless rate is 4%. Find the amount that Eden should spend on this acquisition.

I NEED SOLUTIONS! THANKS!!!

NOTE: PLEASE HAVE ALL ANSWER IN WORD OR EXCEL FORMAT(EDITABLE FORMAT). NO IMAGE ATTACHMENT, PLEASE!

Explanation / Answer

Expected return = Rf+×Rp

Rf is risk free return

Rp is risk premium

= 4%+×1.4×(13%-4%)

= 16.6%

Investment value:

= $23 million÷(16.6%-5%)

= $198.28 million

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