Alarge pet-food manufacturer is considering buying a small boutique cat food business to add to their portfolio of pet foods. the head of the finance division has approached you, a recent twu graduate, to conduct a financial analysis to determine the most the firm should pay for the cat food business.

the valuation of the cat-food business is based on cash flows of $180,500 per year over a five year period. the target business has the same risk as the firm’s overall operations. the cost of equity is 15 percent and the cost of debt is 3 percent on an after-tax basis. the firm’s capital structure consists of 10 million in equity and 8 million in debt.

1. calculate the wacc for this firm?

2. what is the most the firm can pay for the business per its required return (wacc) ?

3. how would a change in the wacc change the amount the firm would be willing to pay for the cat food business?

show work and explain

answer; private store;

answercontrol is returned to method c;

of the three mortgage options that demarco and tanya have to choose from, the balloon payment mortgage would be their best option, over adjustable payment and fixed payment plans.ultimately, the balloon payment plan would save demarco and tanya overall, in interest, would cost less monthly, and they would only have to make these payments for 8 years, opposing to 30 years for adjustable or fixed payment plans. 

overall, demarco and tanya would save $80,811 if they chose balloon payments over fixed payments, and would save $116,711 if they choose balloon payments over adjustable payments. benefits with choosing fixed payments over adjustable payments is that, in the end, the payments will still be $836.30 a month, while with adjustable payments, the initial monthly payments will be $763.38 to $1082.70 a month, ultimately leading to a more costly purchase. benefits with choosing fixed payments over balloon payments are not present. benefits in choosing adjustable payments over is that it has a lower interest rate, and starts with lower monthly payments initially. benefits in choosing adjustable payments over balloon payments include a lower interest rate, and lower initial monthly payments. benefits in choosing balloon payments over fixed payments include lower interest rates, lower overall price, lower monthly payments, takes less time to pay off, and does not require a downpayment. benefits in choosing balloon payments over adjustable payments include, lower monthly payments (when averaged), takes less time to pay off, and lower overall price.

hence, option c, balloon payments, is the best option for demarco and tanya to make this purchase, for it will save them a minimum of $80811, and a maximum of $116,711.