Pizza Palace (PP), is considering purchasing a smaller chain, Western Mountain Pizza. PP’s analysts expect the merger to result in incremental net cash flows as follows: Y1=$1,900,000, Y2 = $2,200,000, Y3 = $3,500,000, Y4 =$5,800,000. In addition, Western’s Y4 cash flows are expected to grow at a constant rate of 4% after Y4. Western’s post merger beta is expected to be 2 and its tax rate would be 30%. The risk free rate is presently 6% and the market risk premium is 5%. What is the value of Western to Pizza Palace?

Pizza Palace (PP), is considering purchasing a smaller chain, Western Mountain Pizza. PP’s analysts expect the merger to result in incremental net cash flows as follows: Y1=$1,900,000, Y2 = $2,200,000, Y3 = $3,500,000, Y4 =$5,800,000. In addition, Western’s Y4 cash flows are expected to grow at a constant rate of 4% after Y4. Western’s post merger beta is expected to be 2 and its tax rate would be 30%. The risk free rate is presently 6% and the market risk premium is 5%. What is the value of Western to Pizza Palace?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 18P

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