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This problem sets forth the steps the analyst might follow in deciding whether to acquire May and the value to place on the firm.Requireda. Compute the unlevered market equity (asset) beta of May before consideration of the LBO. Assume that the book value of the debt equals its market value. The income tax rate is 35 percent. b. Compute the cost of equity capital with the new capital structure that results from the LBO. Assume a risk-free rate of 4.2 percent and a market risk premium of 5.0 percent.c. Compute the weighted average cost of capital of the new capital structure.d. Compute the present value of the projected free cash flows to all debt and equity capital stakeholders at the weighted average cost of capital. Ignore the midyear adjustment related to the assumption that cash flows occur on average over the year. In computing the continuing value apply the projected growth rate in free cash flows after Year 22 of 3 percent directly to the free cash flows of Year 22.e. Assume that the buyout group acquires May for the value determined in Part d. Assuming that the realized free cash flows coincide with projections will May generate sufficient cash flow each year to service the interest on the debt? Explain.

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