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QUESTION

Hi, could you help me solve this corporate finance question?

Corporate tax rate: 40%

           Unlevered cost of capital (r0): 20%

Both Pentronics and DebtTronics are interested in purchasing Chalktronics.

Pentronics will use no debt financing and DebtTronics will use a target D/E ratio of 10% to finance the acquisition.

A. What is the maximum Pentronics can pay for Chalktronics? (8 pts.)

B. What is the maximum DebtTronics can pay for Chalktronics? (8 pts.)

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