Reference no: EM132982222

Question - Pizza Place, a national pizza chain, is considering purchasing a smaller chain, Western Mountain Pizza. Pizza Place's analysts project that the merger will result in incremental net cash flows of $1.5 million in Year 1, $2 million in Year 2, $3 million in Year 3, and $5 million in Year 4. In addition, Western's Year 4 cash flows are expected to grow at a constant rate of 5% after Year 4. Assume that all cash flows occur at the end of the year. The acquisition will be made immediately if it is undertaken. Western's post-merger beta is estimated to be 1.5, and its post merger tax rate would be 40%. The risk-free rate is 6%, and the market risk premium is 4%.

Required -

QUESTION 1: What is the maximum bid price per share of Pizza Place for Western Mountain Pizza?

QUESTION 2: How much is the projected terminal cashflow (cashflow after year 4 to infinity) from Western Mountain Pizza?

QUESTION 3: 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?