Determining value of sgp to sid


Sid Auto, a national auto parts chain, is considering purchasing a smaller chain, South Georgia Parts (SGP). Sid's analysts project that the merger will outcome in the given incremental free cash flows and horizon values (in millions):

Year 1 2 3 4

Free cash flow $2 $4 $5 $10

Unlevered horizon value 107

Suppose that all cash flows take place at the end of the year. SGP is presently financed with 30% debt at a rate of 10%. The acquisition would be made instantly, and if it is undertaken, SGP would retain its present $15 million of debt and issue enough new debt to continue at the 30% target level. The interest rate would remain similar. 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%. Find out the value of SGP to Sid?

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Accounting Basics: Determining value of sgp to sid
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