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%. What is the total value of Western Mountain Pizza to Pizza Place? 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%. What is the total value of Western Mountain Pizza to Pizza Place? Show your solution.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter23: Corporate Restructuring

Section: Chapter Questions

Problem 11P

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Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. Should Wansley purchase the paper company? Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.
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, $1,500,000; Year2, $2,000,000; Year3, $3,000,000; Year4, $5,000,000. 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%. Question: How much is the projected terminal cashflow (cashflow after year 4 to infinity) from Western Mountain Pizza?
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, $1,500,000; Year2, $2,000,000; Year3, $3,000,000; Year4, $5,000,000. 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%. REQUIRED: 1. What is the maximum bid price per share of Pizza Place for Western Mountain Pizza? 2. If Western Mountain Pizza has 5,000,000 outstanding shares and are currently selling at $13. How much is the minimum acceptable price (in total) for Western Mountain Pizza?
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%. How much is the projected terminal cashflow (cashflow after year 4 to infinity) from 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%. What is the maximum bid price per share of Pizza Place for Western Mountain Pizza? Show your solution
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