Question: Payton Pizza (PP), is considering purchasing a smaller chain, Long Mountain Pizza. PP's analysts expect the merger to result in incremental net cash flows as

Payton Pizza (PP), is considering purchasing a smaller chain, Long Mountain Pizza. PP's analysts expect the merger to result in incremental net cash flows as follows: Y1=$1,500,000, Y2 = $2,000,000, Y3 = $3,000,000, Y4 =$5,000,000. In addition, Long's Y4 cash flows are expected to grow at a constant rate of 5% after Y4. Long's post-merger beta is expected to be 1.5 and its tax rate would be 40%. The risk free rate is presently 5% and the market risk premium is 4%. What is the value of Long Mountain Pizza to Payton Pizza?

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