1. Imagine Paul's Pizza and Pizza Paulina are considering a merger. The owners get together and analyze the project. They find that the incremental net cash flows as the following: Years 0 1 2 3 4
$ 150,000 $ 200,000 $ 300,000 $ 500,000
After the 4th year, they expect the cash flows to grow at a constant rate of 5%. The post merger beta is estimated to be 1.5. The risk-free rate is 6%. The market risk premium is 4%. What is the value of the combined pizzeria? Should the merger proceed?