For this and the next 3 questions: Pit Row Auto, a national auto parts chain, is considering purchasing a smaller chain, Southern Auto. Pit Row'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
FCF	$1	$3	$3	$7
Unlevered horizon value				$75
Interest tax savings	$1	$1	$2	$3
Horizon value of interest tax savings				$32

Assume all cash flows occur at the end of the year. Southern is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, if it is undertaken and Southern would retain its current $15 million in debt and issue new debt in order to continue targeting a 30% debt level. The interest rate will remain the same. Southern's pre-merger beta is estimated to be 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%. Using the CAPM, calculate Southern Auto's cost of levered equity.

		16%
		14.2%
		8%
		None of the above

1 points

QUESTION 10

Calculate Southern Auto's cost of unlevered equity.

		16%
		14.2%
		8%
		None of the above

1 points

QUESTION 11

Calculate Southern Auto's value of operations.

		$53.401 million
		$61.965 million
		$64.641 million
		$76.965 million
		$79.645 million

1 points

QUESTION 12

What is the value of Southern Auto's equity to Pit Row Auto?

		$53.401 million
		$61.965 million
		$64.641 million
		$76.965 million
		$79.645 million