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Pizza Place, a national pizza chain is considering purchasing a smaller chain, Western Mountain Pizza. Projected cash flows as a result of the merger are: Year1, P1,500,000; Year2, P2,000,000; Year3, P3,000,000; Year4, P5,000,000. In addition, Western's year4 cashflows are expected to grow at a constant rate of 5% after year 4. Western's post merger beta is estimated to be 1.5 and its post-merger tax rate is 40%. The risk-free rate is 6% and the market risk premium is 4%.   If Western Mountain Pizza has 5,000,000 outstanding shares and are currently selling at P13. How much is the minimum acceptable price (in total) for Western Mountain Pizza? Show your solution.

Pizza Place, a national pizza chain is considering purchasing a smaller chain, Western Mountain Pizza. Projected cash flows as a result of the merger are: Year1, P1,500,000; Year2, P2,000,000; Year3, P3,000,000; Year4, P5,000,000. In addition, Western's year4 cashflows are expected to grow at a constant rate of 5% after year 4. Western's post merger beta is estimated to be 1.5 and its post-merger tax rate is 40%. The risk-free rate is 6% and the market risk premium is 4%.   If Western Mountain Pizza has 5,000,000 outstanding shares and are currently selling at P13. How much is the minimum acceptable price (in total) for Western Mountain Pizza? Show your solution.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Pizza Place, a national pizza chain is considering purchasing a smaller chain, Western Mountain Pizza. Projected cash flows as a result of the merger are: Year1, P1,500,000; Year2, P2,000,000; Year3, P3,000,000; Year4, P5,000,000. In addition, Western's year4 cashflows are expected to grow at a constant rate of 5% after year 4. Western's post merger beta is estimated to be 1.5 and its post-merger tax rate is 40%. The risk-free rate is 6% and the market risk premium is 4%.

 

If Western Mountain Pizza has 5,000,000 outstanding shares and are currently selling at P13. How much is the minimum acceptable price (in total) for Western Mountain Pizza? Show your solution.
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