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Great Subs, Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern… 1 answer below » Great Subs, Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed using 20% debt at a cost of 8%. 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 3.1, and its post-merger tax rate would be 34%. The risk- View complete question » Great Subs, Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed using 20% debt at a cost of 8%. 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 3.1, and its post-merger tax rate would be 34%. The risk-free rate is 6%, and the market risk premium is 4.5%. What is the appropriate rate to use in discounting the free cash flows and the interest Document Preview: Great Subs, Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed using 20% debt at a cost of 8%. 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 3.1, and its post-merger tax rate would be 34%. The risk-free rate is 6%, and the market risk premium is 4.5%. 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? Blazer Inc. is thinking of acquiring Laker Company. Blazer expects Laker’s NOPAT to be $9 million the first year, with no net new investment in operating capital and no interest expense. For the second year, Laker is expected to have NOPAT of $28 million and interest expense of $6 million. Also, in the second year only, Laker will need $10 million of net new investment in operating capital. Laker’s marginal tax rate is 40%. After the second year, the free cash flows and the tax shields from Laker to Blazer will both grow at a constant rate of 3%. Blazer has determined that Laker’s cost of equity is 18.0%, and Laker currently has no debt outstanding. Assume that all cash flows occur at the end of the year and that Blazer must pay $45 million to acquire Laker. What is the NPV of the proposed acquisition? Note that you must first calculate the value to Blazer of Laker’s equity. Rainier Bros. has 10.0% semiannual coupon bonds outstanding that mature in 10 years. Each bond has a par value of $1,000 and is now eligible to be called at $1,090. If the bonds are called, the company must replace them with new 10 year bonds. The flotation cost of issuing the new bonds is estimated to be $45… Attachments: Q..docx View less » Sep 21 2015 12:02 PM
