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 the following post merger data for Southern Auto (in millions of dollars, with a December 31 year-end)

	2005	2006	2007	2008
Net Sales	$450	$518	$555	$600
Selling and administrative expenses	45	53	60	68
Interest	18	21	24	27

The cost of goods sold is expected to be 65 percent of sales each year.

If the acquisition is made, it will occur on January 1, 2005. All cash flows shown in the income statements are assumed to occur at the end of the year. After 2008, the net cash flows from Southern Auto to Pit Row Auto will grow at a constant rate of 7 percent.

Depreciation-generated funds would be used to replace worn-out equipment, so they would not be available to Pit Row Autos shareholders. Southern Auto 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 Southern Auto as net investment in operating capital, and hence not available to Pit Row Autos shareholders.

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 $150 million in debt and issue new debt in order to continue targeting a 30% debt level. The interest rate will remain the same. Southern Autos pre-merger beta is estimated to be 1.50 and its post-merger tax rate would be 40 percent. The risk-free rate is 8 percent, and the market risk premium is 4 percent.

Southern Auto has 10 million shares outstanding. Southern Auto's current price is $35.

14. What is the maximum price per share that Pit Row Auto should offer without hurting the wealth of Pit Row Autos current shareholders?

1. $25.42
2. $35.08
3. $52.63
4. $71.94
5. $95.63

15. If Pit Row Auto is able to close the deal at a price of $500 million by paying cash. Suppose the total value of Pit Row Autos equity is equal to $1,000 million, and it has 10 million shares outstanding. What is the price per share of the combined firm after merger?

1. $50

2. $71.94

3. $100

4. $105.65

5. $121.94