Raymond Supply,a National Hardware Chain,is Considering Purchasing a Smaller Chain,Strauss

Raymond Supply,a national hardware chain,is considering purchasing a smaller chain,Strauss & Glazer Parts (SGP) .Raymond's analysts project that the merger will result in the following incremental free cash flows,tax shields,and horizon values: $$\begin{array} { l c c c c } \text { Year } & 1 & 2 & 3 & 4 \\\hline \text { Free cash flow } & \$ 1 & \$ 3 & \$ 3 & 4 \\\text { Unlevered horizon value } & & & & 75 \\\text { Tax shield } & 1 & 1 & 2 & 3 \\\text { Horizon value of tax shield } & & & & 3\end{array}$$
Assume that all cash flows occur at the end of the year.SGP is currently financed with 30% debt at a rate of 10%.The acquisition would be made immediately,and if it is undertaken,SGP 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.SGP'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 SGP to Raymond?

A) $53.40 million
B) $61.96 million
C) $64.64 million
D) $76.96 million
E) $79.64 million

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free