Question

whitewater (whose wacc is 12%) is considering an acquisition of raft adventures (whose wacc is 15%). what is the appropriate discount rate for whitewater to use to evaluate the acquisition? why?

Answer 1

Whitewater should use its own WACC of 12% as the discount rate to evaluate the acquisition of Raft Adventures, adjusting if necessary for changes in risk profile post-acquisition.

Step-by-step explanation:

The appropriate discount rate that Whitewater should use to evaluate the acquisition of Raft Adventures is a point of financial strategy. Generally, the acquiring company should use its own Weighted Average Cost of Capital (WACC) when valuing a target company. Therefore, Whitewater should use its own WACC of 12% because it reflects the return expected by its own investors. However, it is important to consider the risk profile of the acquired company. If Raft Adventures is significantly riskier, it may warrant a higher rate. Conversely, if the acquisition is expected to reduce the overall risk of Whitewater, then it might be justified to use a rate lower than 12%. Ultimately, the decision should reflect the expected risks and returns post-acquisition.