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# Adjusted Present Value: Calculate the value of Company B's equity to Company A

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Company A, is considering purchasing a smaller chain, Company B. Company A's analysts project that the merger will result in incremental free cash flows and interest tax savings 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 horizon value of \$107 million. Assume all cash flows occur at the end of the year. Company B is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, if it is undertaken and Company B would retain its current \$15 million in debt and issue new debt in order to continue targeting a 30% debt level. The interest rate will remain the same. Company B's pre-merger beta is estimated to be 2.0, and its post-merger tax rate would be 34 percent. The risk-free rate is 8 percent, and the market risk premium is 4 percent. What is the value of Company B's equity to Company A?

Any assistance would be much appreciated.