Lavender Repair Company, a regional hardware chain that specializes in $$do it yourself$$

materials and equipment rentals, is cash rich because of several consecutive good years.

One of the alternative uses for the excess funds is an acquisition. Doug Zona, Lavender$$s

treasurer, and your boss, has been asked to place a value on a potential target, Lyons

Lighting $($LL$),$ a chain that operates in several adjacent states, and he has enlisted your

help.

The table below indicates Zona$$s estimates of LL$$s earnings potential if it came under

Lavender$$s management $($in millions of dollars$).$ The interest expense listed here includes

the interest: $(1)$ on LL$$s existing debt, which is $ million at a rate of $9\%,$ and $(2)$ on new

debt expected to be issued over time to help finance expansion within the new $$L

division,$$ the code name given to the target firm. If acquired, LL will face a $35\%$ tax rate.

Security analysts estimate LL$$s beta to be X$.$ The acquisition would not change Lyons$$

capital structure, which is $22\%$ debt. Zona realizes that Lyons Lighting$$s business plan

also requires certain levels of operating capital and that the annual investment could be

significant. The required levels of total net operating capital are listed in the table.

Zona estimates the risk$-$free rate to be $7\mathrm{.}2\%$ and the market risk premium to be $4\mathrm{.}75\%.$ He

also estimates that free cash flows after $2020$ will grow at a constant rate of Z a$.$ Several reasons have been proposed to justify mergers. Among the more prominent are: $(1)$ tax considerations, $(2)$ risk reduction, $(3)$ control, $(4)$ purchase of assets at below replacement cost, $(5)$ synergy, and $(6)$ globalization. In general, which of the reasons are economically justifiable? Which are not? Which fit the situation at hand? Explain.