Discounting the free cash flows and the interest tax savings

Assignment Help Financial Management
Reference no: EM131089284

A regional restaurant chain, Club Café, is considering purchasing a smaller chain, Sally's Sandwiches, which is currently financed using 25% debt at a cost of 8%. Club Café's analysts project that the merger will result in incremental free cash flows and interest tax savings of $2.5 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $127 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.) The acquisition would be made immediately, if it is to be undertaken. Sally's pre-merger beta is 2.0, and its post-merger tax rate would be 40%. The risk-free rate is 8%, and the market risk premium is 4%. What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

Reference no: EM131089284

Questions Cloud

Risk-free rate-market risk premium and beta : Steeler Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: risk-free rate (rRF) = 4.10%; market risk premium = 5.25%; and beta = 1.30. Based on the CAPM approach, what is the..
Present value of single sum to be received in the future : The present value of a single sum to be received in the future:
Stockholders of the acquired and acquiring companies : Hostile acquisitions create real animosities between the stockholders of the acquired and acquiring companies. Comment on the truth of this statement.
Nominal annual rate should she quote to her credit customers : Anne Lockwood, manager of Oaks Mall Jewelry, wants to sell on credit, giving customers 3 months to pay. However, Anne will have to borrow from her bank to carry the accounts receivable. What nominal annual rate should she quote to her credit customer..
Discounting the free cash flows and the interest tax savings : A regional restaurant chain, Club Café, is considering purchasing a smaller chain, Sally's Sandwiches, which is currently financed using 25% debt at a cost of 8%. The risk-free rate is 8%, and the market risk premium is 4%. What is the appropriate ra..
Annualized basis-what is the yield-to-maturity of bond : " United Air has a 8.5% coupon 22 year bond (par value = $1,000). Assume that coupon payments are semi-annual and that the current price is $1025.55. What is the yield-to-maturity of this bond? Be sure to report on an annualized basis"
How many years will it take to reach your goal : Number of Periods of an Annuity You have $42,149.51 in a brokerage account, and you plan to deposit an additional $5,500 at the end of every future year until your account totals $250,000. You expect to earn 10.7% annually on the account. How many ye..
What is the current price of the stock : XYZ company is expected to pay an $8 dividend one year from now and a $2 dividend two years from now. Two years from now immediately after the $2 dividend was paid, you also expect to be able to sell the stock at $16.50. If you have a required rate o..
You are the lead consultant for the excellent consulting : You are the lead consultant for the Excellent Consulting Group. It is mid-October. One of your top clients, Buddy's Floor Barn, has just closed the books for the first three quarters of the year (January through September). Buddy's Floor Barn request..

Reviews

Write a Review

Financial Management Questions & Answers

  Size-up hcm using historical ratio analysis

Value the business from the potential buyer's (Great Wall) viewpoint, considering the changes that it will make, explaining fully.

  Decide to invest in corporate bonds

Suppose you decide to invest in corporate bonds. Accordingly, you visit a bond store. You see 3 bonds on the shelf. One is priced at $1,015.53, another is priced to sell at $1,300.00, and a third is selling at a discounted amount of $876.06. But you ..

  Is aggies transaction exposure likely to be affected

All of these companies invoice the products in US dollars. Is Aggie's transaction exposure likely to be significantly affected if the euro strengthens or weakens? Explain.

  The market requires return-dividend paid per share

Secolo Corporation stock currently sells for $79 per share. The market requires a return of 9.6 percent on the firm’s stock. If the company maintains a constant 2.8 percent growth rate in dividends, what was the most recent dividend per share paid on..

  Book value per share-earnings per share-cash flow per share

You are given the following information for Smashville, Inc. Cost of goods sold: $ 209,000 Investment income: $ 2,100 Net sales: $ 392,000 Operating expense: $ 90,000 Interest expense: $ 7,400 Dividends: $ 14,000. Calculate the book value per share, ..

  Market expected return

A stock has an expected return of 15 percent, its beta is 1.55, and the risk-free rate is 6.5 percent. What must the expected return on the market be?

  Computation of the risk premium for an individual security

Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market.

  Capital structure shift change the firm cost of equity

Lauterbach Corporation uses no debt, its beta is 1.0, and its tax rate is 40%. However, the CFO is considering moving to a capital structure with 30% debt and 70% equity. If the risk-free rate is 5.0% and the market risk premium is 6.0%, by how much ..

  Calculate total cost of ordering and carrying inventories

Start with the partial model Ch 28 P3 Build a Model.Xls from the textbook's website. The following inventory data have been established for the Adler Corporation: (1). Orders must be placed of 100 Units. (2). Annual Sales are 338,000 Units. Calculate..

  Apple stock has an average return

Apple stock has an average return of 12% and a beta of 1.1. Google stock has an average return of 14% and a beta of 1.2. The risk free rate is 5% and the expected return on the market is 10%. If you can only pick one stock to buy, which one would you..

  What is the target stock price in one year

Fly Away, Inc., has balance sheet equity of $5.9 million. At the same time, the income statement shows net income of $885,000. The company paid dividends of $473,475 and has 150,000 shares of stock outstanding. If the benchmark PE ratio is 23, what i..

  Corporate tax rate-what is the NPV of the project

Suppose Klausenheimer, Inc. is considering a new project. The project alone will cost $50,000,000 and is expected to generate after-tax cash flows of $5,000,000, $6,000,000 and 7,000,000 during the first three years. To account for the additional ris..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd