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Brau Auto - 5 Feb, 2012

Brau Auto, a national autoparts chain, is considering purchasing a smaller chain, South Georgia Parts (SGP).  Brau'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%.  What is the value of SGP to Brau?



Category : Financial Management

Search Keywords :
Brau , Automsouth , Georgia , Parts , SGP , Value , Incremental , Free , Cash 


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Answer  - 5 Feb, 2012
Value = PV of unlevered cash flows + PV of tax shield Levered cost of equity....


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