What is the current value of eastern common stock

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Problem 1: Great Lakes Inc., a regional medical group practice, is considering purchasing a smaller group practice, Eastern Physicians, which has $20 million of debt at a cost of 8 percent. Great Lakes' analysts project that the merger will result in free operating cash flows of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a terminal value of $107 million.) The acquisition would be made immediately, if it is to be undertaken. Eastern Physicians premerger beta is 2.0, and its post-merger tax rate would be 30 percent. The risk-free rate is 8 percent and the market risk premium is 4 percent. Eastern has a target of 20 percent debt for its target capital structure. What is the current value of Eastern's common stock?

Reference no: EM132635956

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