Description of this paper

My Subs, Inc., a regional sandwich chain, is con...

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Question

My Subs, Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed using 30% debt at a cost of 7%. Great Subs' 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 the horizon value of $107 million.) The acquisition would be made immediately, if it is to be undertaken. Eastern's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 4%, and the market risk premium is 6%. What is the appropriate rate to use in discounting the free cash flows and the interest tax savings if you use the Adjusted Present Value approach?,China Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware. Dunbar's analysts project that the merger will result in incremental free cash flows and interest tax savings with a combined present value of $92.75 million, and they have determined that the appropriate discount rate for valuing Eastern is 16%. Eastern has 5 million shares outstanding and no debt. Eastern's current price is $16.25 per share. What is the maximum price per share that Dunbar should offer?

 

Paper#1696 | Written in 18-Jul-2015

Price : $25
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