What is the present value of operations

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The owners of a local coffee shop, Park Coffee House, are considering the purchase of a teahouse. Park is currently financed with 40% debt at a rate of 12.2%. It projects its free cash flow to be $2.0 million, $2.5 million, and $3.1 million over the next three years. It also projects its tax shields to be $300,000, $255,000, and $1,200,000 over the next three years. Analysts project that the unlevered horizon value (free cash flows) is $76 million at the end of year 3 and the horizon value of the tax shield is $21 million at the end of year 3. Park would want to make the acquisition immediately. Its pre-merger beta is 1.60 and its post-merger tax rate is 35%. If the risk-free rate is 2.5% and the market risk premium is 6%, what is the present value (unlevered) of operations?

Reference no: EM131025591

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