Kansas City Deck Supply, a small residential builder of decks, is considering purchasing a lumber supplier (Midwest Pine). KC Deck'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
Tax shield	1	1	2	3
Horizon value of tax shield				32

Assume that all cash flows occur at the end of the year. Midwest Pine is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, and if it is undertaken, Midwest Pine 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. Midwest Pine's premerger beta is 2.0 and its postmerger tax rate would be 34%. The riskfree rate is 8% and the market risk premium is 4%. What is the value of Midwest Pine to KC Deck?

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