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MERGER VALUE Pizza Place, a national pizza chain, is considering purchasing a smaller chain, Western Mountain Pizza. Pizza Places analysts project that the merger will result in incremental net cash flows of $1.5 million in Year 1, $2 million in Year 2, $3 million in Year 3, and $5 million in Year 4. In addition, Westerns Year 4 cash flows are expected to grow at a constant rate of 5% after Year 4. Assume that all cash flows occur at the end of the year. The acquisition will be made immediately if it is undertaken. Westerns post-merger beta is estimated to be 1.5, and its post-merger tax rate would be 40%. The risk-free rate is 6%, and the market risk premium is 4%. What is the value of Western Mountain Pizza to Pizza Place?
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