Pit Row Auto, a national auto parts chain, is considering purchasing a smaller chain, Southern Auto. Pit Row's analysts project that the merger will result in incremental net 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. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it were undertaken. Southern's post-merger beta is estimated to be 2.0, the risk-free rate is 8 percent, and the market risk premium is 4 percent. Both firms are all-equity financed. What should the analysts' use as the discount rate as they value Southern for Pit Row? Question 14 options: 16% 0% 12% 20% 1
Pit Row Auto, a national auto parts chain, is considering purchasing a smaller chain, Southern Auto. Pit Row's analysts project that the merger will result in incremental net 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. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it were undertaken. Southern's post-merger beta is estimated to be 2.0, the risk-free rate is 8 percent, and the market risk premium is 4 percent. Both firms are all-equity financed. What should the analysts' use as the discount rate as they value Southern for Pit Row?
Question 14 options:
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16%
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0%
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12%
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20%
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1
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