Maraston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is publicly traded

Maraston Marble Corporation is considering a merger with the Conroy Concrete Company.  Conroy is publicly traded company, and its beta is 1.30.  Conroy has been barely profitable, so it has paid an average of only 20% in taxes during the last several years.  In addition, it uses little debt, having a target ratio of just 25%, with the cost of debt 9%.

If the acquisition were made, Marston would operate Conroy as a separate, wholly owned subsidiary.  Marston would pay taxes on a consolidate basis, and the tax rate would therefore increase to 35%.  Marston also would increase the debt capitalization in the Conroy subsidiary to wD = 40% for a total of $22.27 million in debt by the end of year 4 and pay 9.5% on the debt.  Marston's acquisition department estimates that Conroy, if acquired, would generate the following free cash flows and interest expenses (in millions of dollars) in Year 1-5:

In Year 5 Conroy's interest expense would be based on its beginning of year (that is, the end of Year 4) debt, and in subsequent years both interest expense and free cash flows are projected to grow at a rate of 6%.
These cash flows include all acquisition effects.  Marston's cost of equity is 10.5%, its beta is 1.0, and its cost of debt is 9.5%.  The risk free rate is 6%, and the market risk premium is 4.5%. (Missed taken form text book)
A. What is the value of Conroy's unlevered operation, and what is the value of Conroy's tax shield under the proposed merger and financing arrangements?
B- What is the dollar value of Conroy's operations?  If Conroy has $10 million in debt outstanding, how much would Marston be willing to pay forConroy?

Transcribed Image Text:

0 s3781 - te122? s20502 5701 CS1122 Y12345