Raymond Supply, anational hardware chain, is considering purchasing a smaller chain,Strauss & Glazer Parts (SGP). Raymond\'s analysts project thatthe merger will result in the following free cash flows and interest expenses. After Year 4, both free cash flows and interestexpenses will grow at constant rate of 4%.

Year	1	2	3	4
Free cash flows	$100	$300	$300	$500
Interest expense	10	10	15	20

Assume that all cash flows occur at the end of the year. SGP has2 million shares outstanding and a target capital structureconsisting of 40% debt and 60% common equity. . Cost of debtis 10%. SGP\'s pre-merger beta is 2.0, and its post-merger tax ratewould be 34%. The risk-free rate is 8% and the market risk premiumis 4%.

Using a APV method, answer the followingquestions.

Which discount rate should be used to value of the tax shieldsof SGP? (5points)

What is the total corporate value of SGP to Raymond SupplyCorporation? (20 points)

Answer rating: 100% (QA)

Answer To answer the questions we need to use the Adjusted Present Value APV method 1 Which discount ... View the full answer