1. Brau Auto a national autoparts chain is consideringpurchasing a smaller chain

1. Brau Auto a national autoparts chain is consideringpurchasing a smaller chain South Georgia Parts (SGP). Brausanalysts project that the merger will result in the followingincremental free cash flows tax shields and horizon values:Years 1 2 3 4Free cash flow $1 $3 $3 $7Unlevered horizon value 75Tax shield 1 1 2 3Horizon value of tax shield 32Assume that all cash flows occur at the end of the year. SGP iscurrently financed with 30% debt at a rate of 10%. The acquisitionwould be made immediately and if it is undertaken SGP wouldretain its current $15 million of debt and issue enough new debt tocontinue at the 30% target level.The interest rate would remain the same. SGPs pre-merger beta is2.0 and its post-merger tax rate would be 34%. The risk-free rateis 8% and the market risk premium is 4%. What is the value of SGPto Brau?