Alpha Corp purchases Beta Sub. Alpha Corp finances the purchase price of € 100 million by raising € 50 million in debt and € 50 million in equity issued by Alpha. The debt is risk free and the interest rate that the firm pays on its debt is 2%. Alpha Corp has a target capital structure of 0.4 (D/V) and cost of equity of 9%, companies in a comparable industry as Beta Sub have a target capital structure of 0.6 (D/V) and a cost of equity of 10%. Alpha’s marginal tax rate is 20%.

Assume that the project generates an expected free cash flow of € 6 million in every future period.

Q:How large is the value of Beta Sub?

I would have used the target capital structure of the compareable firms and the cost of equity of the compareable firms in order to calculate the $r_{wacc}$ of Beta Sub.



$V_{beta}=\frac{6}{r_{wacc}}$ .

Would this be correct?


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