# Appropriate Discount Rate for Acquisitions

Please help with the following problem.

American Pizza, a national pizza chain, is considering purchasing a smaller chain, Eastern Pizza. American'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 cashflow includes a terminal value of $107 million.) The acquisition would be made immediately if it is undertaken. Eastern's post-merger beta is estimated to be 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 appropriate discount rate for valuing the acquisition?

a. 17%

b. 16%

c. 15%

d. 14%

e. 12%

https://brainmass.com/business/mergers-and-acquisitions/appropriate-discount-rate-acquisitions-260210

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The question seems to be incomplete. It does not talk about the capital structure of the Eastern Pizza. The appropriate discount rate is ...

#### Solution Summary

This solution identifies the appropriate discount rate and shows step-by-step calculations to determine the cost of equity. Step by step calculations are given.