Reference no: EM132795333

Marston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its beta is 1.35. Conroy has been barely profitable, so it has paid an average of only 30% in taxes during the last several years. In addition, it uses little debt; its target ratio is just 20%, with the cost of debt 9%.

• If the acquisition were made, Marston would operate Conroy as a separate, wholly owned subsidiary. Marston would pay taxes on a consolidated basis, and the tax rate would therefore increase to 40%. Marston also would increase the debt capitalization in the Conroy subsidiary to wd = 45%, for a total of $17.96 million in debt by the end of Year 4, and pay 10.0% on the debt. Marston's acquisition department estimates that Conroy, if acquired, would generate the following free cash flows and interest expenses (in millions of dollars) in Years 1-5:

Year           Free Cash Flows            Interest Expense

1                         $1.30                        $1.2

2                          1.50                             1.7

3                              1.75                     2.8

4                                 2.00                        2.1

5                                   2.12                           ?

• In Year 5, Conroy's interest expense would be based on its beginning-of-year (that is, the end-of-Year-4) debt, and in subsequent years both interest expense and free cash flows are projected to grow at a rate of 7%.
• These cash flows include all acquisition effects. Marston's cost of equity is 10.6%, its beta is 1.2, and its cost of debt is 9.5%. The risk-free rate is 7%, and the market risk premium is 3.0%.

Use the compressed APV model to answer the following questions.

Problem 1: What is the value of Conroy's unlevered operations? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.

Problem 2: What is the value of Conroy's tax shields under the proposed merger and financing arrangements? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate calculations.

Problem 3: What is the dollar value of Conroy's operations? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million

Problem 4: If Conroy has $10 million in debt outstanding, how much would Marston be willing to pay for Conroy? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate calculations.