Pizza Place, a national pizza chain, is considering purchasing a smallerchain, Western Mountain Pizza. Pizza Place’s analysts project that the merger will resultin incremental cash flows of $1.5 million in Year 1, $2 million in Year 2, $3 million inYear 3, and $5 million in Year 4. In addition, Western’s Year 4 cash flows are expectedto grow at a constant rate of 5% after Year 4. Assume that all cash flows occur at theend of the year. The acquisition will be made immediately if it is undertaken. Western’spost-merger beta is estimated to be 1.5, and its post-merger tax rate would be 40%. Therisk-free rate is 6%, and the market risk premium is 4%. What is the value of WesternMountain Pizza to Pizza Place?
Pizza Place, a national pizza chain, is considering purchasing a smaller
chain, Western Mountain Pizza. Pizza Place’s analysts project that the merger will result
in incremental cash flows of $1.5 million in Year 1, $2 million in Year 2, $3 million in
Year 3, and $5 million in Year 4. In addition, Western’s Year 4 cash flows are expected
to grow at a constant rate of 5% after Year 4. Assume that all cash flows occur at the
end of the year. The acquisition will be made immediately if it is undertaken. Western’s
post-merger beta is estimated to be 1.5, and its post-merger tax rate would be 40%. The
risk-free rate is 6%, and the market risk premium is 4%. What is the value of Western
Mountain Pizza to Pizza Place?
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 4 images
