Blazer Breaks, Inc. is considering an acquisition of Laker Showtime Company. If the acquisition is made, the post merge data for Laker will look like this (in millions of dollars).

	2012	2013
Net Sales	$60	$100
Selling and administrative expenses	$4	$6
Interest	$4	$5

In the first year, Laker expects to receive sales revenue of $60 million, selling and administrative expenses of $4 million, and interest expenses of $4 million. For the second year, Laker is expected to have sales revenue of $100 million, selling and administrative expenses of $6 million and interest expense of $5 million. The cost of goods sold is expected to be 65 percent of sales in each year. After the second year, the free cash flows from Laker to Blazer will grow at a constant rate of 4 percent.

Laker will require reinvestment of the 40 percent of its NOPAT to finance this new divisions future growth, which implies that 40 percent of its NOPAT would be retained in Laker, and hence not available to Blazers shareholders. The depreciation-generated funds would be used to replace worn-out equipment, so they would not be available to Blazers shareholders.

Laker is currently financed with 20% debt at a rate of 10%. The acquisition would be made immediately if it is undertaken. Laker would retain its current $20 million in debt and issue new debt in order to continue targeting a 20% debt level. The interest rate will remain the same. Lakers beta is estimated to be 1.50 and its tax rate would be 40 percent. The risk-free rate is 9 percent, and the market risk premium is 4 percent.

Laker has 1 million shares outstanding. Laker's current price is $80.

1. Calculate the free cash flow to Blazer for the first year and the second year
2. Calculate the interest tax saving to Blazer for the first and the second year
3. What is the discount rate you use when valuing the net cash flow from Lakers?
4. Calculate the terminal value (horizon value) of the free cash flow of Blazer.
5. Calculate the terminal value (horizon value) of interest tax saving of Blazer.
6. What is the value of Laker to Blazers shareholders?
7. What is the maximum price per share that Blazer should offer without hurting the wealth of Blazers current shareholders?
8. If Blazer is able to close the deal at a price of $80 million by paying cash. Suppose the total value of Blazers equity is equal to $200 million, and it has 2 million shares outstanding. What is the price per share of the combined firm after merger?