4) Let's think about the merger using the APV approach. Use the FCF found in Part 2 of Problem 2 for next year's cash flow. If you don't like your number, use $383 million. Use a four year model, where you grow that FCF forward each year by 1%. For the interest tax shield, let's assume that they borrow $500 million to finance the merger (I don't think they've disclosed the actual debt needed yet) and that this does not change during the period you are modeling. They will then be carrying that $500 million plus any existing debt on their balance sheet. Use the total amount to find the interest tax shield.

Assume that their interest payments can be found using a cost of debt of 2.5% and that their tax rate is 21%. Assume that both FCF and the interest tax shield grow at 1% forever after Year 4.

a) Find their new levered cost of equity with the new debt (i.e. they have borrowed $500 million, plus any existing debt). You can use their current levered beta from Factset (0.66) and their current capital structure to get the unlevered beta. Use a risk-free rate of 1.5% and an equity risk premium of 5.5%.

b) What is the APV value of operations for SAFM, given these assumptions? Use their new cost of equity found in Part A.