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Business, 01.03.2021 21:30 TheDoges

Berkshire Hathaway Inc. is considering a business expansion to the gambling industry by acquiring a casino which generates $20 million free cash flow per year indefinitely. The risk-free rate of return is 5% and the market risk premium, over and above the risk-free rate, is 10%. Berkshire estimates that the beta of the casino is 1.2, and plans to maintain the debt-equity ratio of the casino to be one. Berkshire has recently issued bonds which pay an annual coupon of 4% and have a yield to maturity of 5%. Berkshire faces a 40% tax rate. What is the maximum price Berkshire would pay for the casino in order for the acquisition to be acceptable? a. $200.0 million
b. $150.0 million
c. $181.8 million
d. $400.0 million
e. $117.6 million

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