Determine the value of equity

Reference no: EM1373103

Pit Row Auto, a countrywide auto-parts chain, is planning purchasing a smaller chain, Southern Auto. Pit Row's analyst's project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1st, $4 million in Year 2nd, $5 million in Year 3rd, and $117 million in Year 4th. The Year 4 cash flow includes a horizon amount of $107 million. Suppose all cash flows occur at the end of year. Southern is currently financed with 30 percent debt at a rate of 10%. The acquisition would be made straight away, if it is undertaken and Southern would retain its current $15 million in debt and issue new debt in under to continue targeting a 30 percent debt level. The interest rate will remain the same. Southern's pre merger beta is estimated to be 2.0, & its post merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%. Determine the value of Southern Auto's equity to Pit Row Auto?

Reference no: EM1373103

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