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, tax shields, and horizon values:
Year 1 2 3 4
Free cash flow $1 $3 $3 $7
Unlevered horizon value 75
Tax shield 1 1 2 3
Horizon value of tax shield 32
Assume that all cash flows occur at the end of the year. SGP is currently financed with 30% debt at a rate of 10%. The acquisition would 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 30% target level. The interest rate would remain the same. 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%. What is the value of SGP to Brau?© BrainMass Inc. brainmass.com October 25, 2018, 3:55 am ad1c9bdddf
The value of SGP to Brau will be the present value of free cash flows(unlevered) + the present value of interest tax shield.
Since the free cash flows are unlevered (implying that these are equity flows), we would need to discount these cash flows at the unlevered cost of equity.
We calculate ...
The solution explains how to calculate the value of SGP to Brau in 205 words with explained calculations.
An Explanation of the Value Chain Analysis
Value Chain Analysis
What is the Value Chain Analysis:
This describes the activities that take place in a business and relates them to an analysis of the competitive strength of the company.
Task: Provide an outline on value chain analysis and include information on all of the following:
Value chain activities can be grouped into two categories:
- Primary Activities - Those that are primarily concerned with creating and delivering a product (e.g. component assembly)
- Support Activities - Activities (e.g., human resource management) that might increase effectiveness or efficiency
Also, Value Chain Analysis Includes:
- Technology (That which can be used for partnering activities that might add value) to a company's value chain.
- Innovative approaches toward business functions
- Use of the Internet for human resource management (recruitment and management of existing staff), competitive analysis (e.g., collection of intelligence), collection of corporate data for new product development (e.g., internal analysis of sales records to identify potential new products for customers), and increasing responsiveness and effectiveness through the use of Internet technology for customer service and marketing