Brau Auto, a national autoparts chain, is considering

Brau Auto, a national autoparts chain, is considering

Brau Auto, a national autoparts chain, is considering purchasing a smaller chain, South Georgia Parts(SGP). Brau’s analysts project that the merger will result in the following incremental free cash flows, taxshields, and horizon values, in millions of dollars:YearFree Cash FlowsUnlevered Horizon ValueTax ShieldHorizon Value of Tax ShieldAssume that all cash flows occur at the end of the year. SGP is currently financed with 40% debt at a rate of 10%. The acquisition will 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 40% target level. The interestrate will remain the same. SGP’s per-merger beta is 2.0, and its post-merger tax rate would be 34%. Therisk-free rate is 7% and the market risk premium is 4%. What is the value of SGP to Brau?

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