B 1 PROBLEM 3 2 C D E FL G H K L 3 Great Lakes Inc., a regional medical group practice, is considering purchasing a smaller group 4 practice, Eastern Physicians, which has $20 million of debt at a cost of 8 percent. Great Lakes' analysts 5 project that the merger will result in free operating cash flows of $2 million in Year 1, $4 million 6 in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a 7 terminal value of $107 million.) The acquisition would be made immediately, if it is to be undertaken. 8 Eastern's premerger beta is 2.0, and its post-merger tax rate would be 30 percent. The risk-free rate 9 is 8 percent and the market risk premium is 4 percent. Eastern has a target of 20 percent debt for its 10 target capital structure. What is the current value of Eastern's common stock? 11 12 13 14 15 16 56