Determining cash flows happen at ending of year

Reference no: EM1310677

Q1) Acquisition Analysis Brau Auto, national autoparts chain, is considering buying a smaller chain, South Georgia Parts (SGP). In excel Brau's analyst’s project that merger will result in incremental free cash flows, tax shields, and horizon values given below:

Years 1 2 3 4
Free cash flow $1 $3 $3 $7
Unlevered horizon value 75
Tax shield 1 1 2 3
Horizon value of tax shield 32

Suppose that all cash flows happen at the ending of year. SGP is presently financed with 30% debt at the rate of 10%. Acquisition would be made immediately, and if it is undertaken, SGP would retain its present $15 million of debt and issue sufficient new debt to continue at 30% target level.

The interest rate would stay same. SGP's pre-merger beta is= 2.0, and its post-merger tax rate would be= 34%. Risk-free rate is= 8% and market risk premium is 4%. Determine the value of SGP to Brau.

Reference no: EM1310677

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