Reference no: EM131185241

Martin Technologies Inc., a large electronics company, is evaluating the possible acquisition of Columbia Electronics, a regional electronics company. Martin's analysts roect the following post-merger data for Columbia (in millions of dollars); 2015 2016 2017 2018. Net Sales $300 $425 $475 $550 . Selling and administrative expense 40 50 60 75 . Interest 25 30 35 40 . . Tax rate after merger 35%. Cost of goods sold as a percent of sales 75% . Beta after merger 1.2500 . Risk free rate 3% . Market risk premium 7% . Continuing gowth rate of casht flow available to Martin 6% .If the acquisition is made, it will occur on January 1, 2015. All cash flows shown in the income statements are assumed to occur at the end of the year. Columbia currently has a capital structure of 40% debt, but Martin would increse that to 50% if the acquisition were made. Columbia, if independent, would pay taxes at 20%; but its income would be taxed at 35% if it were consolidated. Columbia's current market-determined beta is 1.15, and its investment bankers think that its beta would rise to 1.2500 if the debt ratio were increasd to 50%. The costof goods sold is epected to be 75% of sales, it could vary somewhat. Depreciation-generated funds would be used to replace worn-out equipent, so they would not be available to Martin's shareholders. The risk free rate is 3%, and the market risk premium is 7%. what is the approporate discount rate for valuing the acquisition?