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 post merger data for Southern Auto $($in millions of dollars, with a

December $31$ year$-$end$)$

$2023202420252026$

Net Sales $$450$ $$518$ $$555$ $$600$

Selling and

administrative

expenses

$45536068$

Interest $18212427$

The cost of goods sold is expected to be $65$ percent of sales in each year.

If the acquisition is made, it will occur on January $1,2023.$ All cash flows shown

in the income statements are assumed to occur at the end of the year. After year

$2026,$ the net cash flows from Southern Auto to Pit Row Auto will grow at a

constant rate of $7$ percent.

$5$

Depreciation$-$generated funds would be used to replace worn$-$out equipment, so

they would not be available to Pit Row Auto$$s shareholders. Southern Auto will

require reinvestment of the $40$ percent of its NOPAT to finance this new

division$$s future growth, which implies that $40$ percent of its NOPAT would be

retained in Southern Auto as net investment in operating capital, and hence not

available to Pit Row Auto$$s shareholders.

Southern is currently financed with $30\%$ debt at $10\%$ interest rate. The acquisition

would be made immediately, if it is undertaken and Southern would retain its

current $$150$ million in debt and issue new debt in order to continue targeting a

$30\%$ debt level. The interest rate will remain the same. Southern Auto$$s premerger beta is estimated to be $1\mathrm{.}50$ and its post$-$merger tax rate would be $40$

percent. The risk$-$free rate is $8$ percent, and the market risk premium is $4$ percent.

Southern Auto has $10$ million shares outstanding. Southern Auto's current price is

$$35.$

$13.$ What is the value of Southern Auto to Pit Row Auto$$s shareholders when Rsu$=12\mathrm{.}8$

a$.$ $$254\mathrm{.}25$ million

b$.$ $$350\mathrm{.}88$ million

c$.$ $ $526\mathrm{.}28$ million

d$.$ $ $719\mathrm{.}40$ million

e$.$ $$956\mathrm{.}28$ million