How would the analysis be different if Hager’s intended to recapitalize Lyons’ with 40% debt costing 10% at the end of four years? This amounts to $221.6 million in debt as of the end of 2013.

The table below indicates Zona’s estimates of LL’s earnings potential if it came under Hager’s management (in millions of dollars). The interest expense listed here includes the interest (1) on LL’s existing debt, which is $55 million at a rate of 9 percent, and (2) on new debt expected to be issued over time to help finance expansion within the new “L division,” the code name given to the target firm. If acquired, LL will face a 40 percent tax rate.

Security analysts estimate LL’s beta to be 1.3. The acquisition would not change Lyons’ capital structure, which is 20 percent debt. Zona realizes that Lyons’ Lighting’s business plan also requires certain levels of operating capital and that the annual investment could be significant. The required levels of total net operating capital are listed below.

Zona estimates the risk-free rate to be 7 percent and the market risk premium to be 4 percent. He also estimates that free cash flows after 2014 will grow at a constant rate of 6 percent. Following are projections for sales and other items.

Hager’s management is new to the merger game, so Zona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Zona has developed the following questions, which you must answer and then defend to Hager’s board.

2009 2010 20 2012 2013 2014 Net sales Cost of goods sold (60%) Selling/administrative expense Interest expense Total net operating capit 150.00 150.00 15750 163.50 168.00 173.00 $ 60.00 $ 90.00 $12.50 127.50 $139.70 36.00 54.00 67.50 76.50 83.80 4.50 6.00 7.50 9.00 00 5.00 6.50 6.50 7.00 8.16