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Hello there. Can you please help me with this question? Explain me in details how to solve this problem. Thanks in advance. Merger Valuation Pit

Hello there. Can you please help me with this question? Explain me in details how to solve this problem. Thanks in advance.

Merger Valuation

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 flow includes a 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?

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