Solution-Kansas city deck supply a small residential

Kansas city deck supply a small residential builder of

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Reference no: EM13580501

Kansas City Deck Supply, a small residential builder of decks, is considering purchasing a lumber supplier (Midwest Pine). KC Deck's analysts project that the merger will result in the following incremental free cash flows, tax shields, and horizon values:

Year	1	2	3	4
Free cash flow	$1	$3	$3	$7
Unlevered horizon value
Tax shield	1	1	2	3
Horizon value of tax shield				32

Assume that all cash flows occur at the end of the year. Midwest Pine is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, and if it is undertaken, Midwest Pine would retain its current $15 million of debt and issue enough new debt to continue at the 30% target level. The interest rate would remain the same. Midwest Pine's pre-merger beta is 2.0 and its post-merger tax rate would be 34%. The risk-free rate is 8% and the market risk premium is 4%. What is the value of Midwest Pine to KC Deck?

Reference no: EM13580501

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Kansas city deck supply a small residential builder of

Reference no: EM13580501

Reference no: EM13580501

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