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swimchk13 swimchk13
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A year ago
Brau Auto, a national auto parts chain, is considering purchasing a smaller chain, South Granville Parts (SGP). Brau’s analysts project that the merger will result in the following incremental free cash flows, tax shields, and horizon values:

Year

 

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

Assume that all cash flows occur at the end of the year. SGP is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, and if it is undertaken, SGP would retain its current $15 million of debt and issue enough new debt to continue at the 30% target level. The interest rate would remain the same. SGP’s pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8% and the market risk premium is 4%. What is the value of SGP to Brau?



▸

$53.40 million



▸

$61.96 million



▸

$64.64 million



▸

$76.96 million

Textbook 
Financial Management: Theory and Practice

Financial Management: Theory and Practice


Edition: 4th
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