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 incremental net cash flows 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 a terminal value of $107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it were undertaken. Southern's post-merger beta is estimated to be 2.0, the risk-free rate is 8 percent, and the market risk premium is 4 percent. Both firms are all-equity financed. What should the analysts' use as the discount rate as they value Southern for Pit Row? Question 14 options:     16%       0%       12%       20%   1

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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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 incremental net cash flows 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 a terminal value of $107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it were undertaken. Southern's post-merger beta is estimated to be 2.0, the risk-free rate is 8 percent, and the market risk premium is 4 percent. Both firms are all-equity financed. What should the analysts' use as the discount rate as they value Southern for Pit Row?

Question 14 options:

 

 

16%

 

 

 

0%

 

 

 

12%

 

 

 

20%

 

1

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