Question
Raymond Supply, a national hardware chain, is considering purchasing a smaller chain, Strauss & Glazer Parts (SGP). Raymond's analysts project that the merger will result
Raymond Supply, a national hardware chain, is considering purchasing a smaller chain, Strauss & Glazer Parts (SGP). Raymond'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 | 75 | |||
| Tax shield | 1 | 1 | 2 | 3 |
| Horizon value of tax shield | 32 |
Assume that all cash flows occur at the end of the year. SGP is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, and if it is undertaken, SGP 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. SGP's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8% and the market risk premium is 4%. Using the compressed adjusted present value approach, what is SGP's value of tax shields?
| a. | $64.64 million | |
| b. | $61.96 million | |
| c. | $53.40 million | |
| d. | $23.56 million | |
| e. | $76.96 million |
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Advances In Financial Machine Learning
Authors: Marcos Lopez De Prado
1st Edition
1119482089, 978-1119482086
