Hello, I would like help with this question. I don't just need the answer, I need to
Question:
Hello, I would like help with this question. I don't just need the answer, I need to know how to figure out the question. Preferably in excel as I like to follow the formula to see how you arrive to the answer.
Pit Row Auto, a national auto parts chain, is considering purchasing a smaller
chain, Southern Auto. Pit Row's analysts project that the merger will result in
incremental free cash flows and interest tax savings of $2 million in Year 1, $4
million in Year 2, $5 million in Year 3, and $117 million in Year 4. The Year 4
cash flowincludesa horizon value of $107 million. Assume all cash flows occur at
the end of the year. Southern is currently financed with 30% debt at a rate of 10%.
The acquisition would be made immediately, if it is undertaken and Southern
would retain its current $15 million in debt and issue new debt in order to continue
targeting a 30% debt level. The interest rate will remain the same. Southern's pre-
merger beta is estimated to be 2.0, and its post-merger tax rate would be 34
percent. The risk-free rate is 2 percent, and the market risk premium is 6 percent.
What is the value of Southern Auto's equity to Pit Row Auto?