How to evaluate financing alternative for M&A - discount rate
Hi guys, I have a question related with M&A deals financing.
Let's assume there are two financing alternatives
Strategies:|debt |equity | maturity (years | interest rate
Strategy 1 | 75 | 25 | 7 | 7.50%
Strategy 2 | 100 | 0 | 6 | 13.50%
The question is: What is the trade-off between the two financing alternatives? Which financing choice should Wathen choose?
And we are given [Hint: Look at the debt service under the first alternative (it is supposed to be second I think); Value the 45% equity stake in the combined firm that is given up (in exchange for $25m) under the second alternative.]
What I plan to do is to compare Equity under both cases, and to take into account tax shield on interest payments. My question is with which value should I discount tax shield on interest payments?
Am I correct that debt service shouldn't be taken into account? Should we discount it with cost of debt of our company, CoE or WACC? Maybe you have better strategy to deal with it?
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