The interest rate would remain the same. SGP’s pre-merger beta is 2.0 , and its post-merger tax rate would be 34%. The risk-free rate is 8% and the market risk premium is 4%. What is the value of SGP to Brau?

To calculate SGP’s value to Brau we must first determine the cost of equity. This can be done by using the Capital Asset Pricing Model (CAPM), which states that: Cost of Equity = Risk-Free Rate + Beta x (Expected Market Return – Risk-Free Rate).

Plugging in our given values we get: Cost of Equity = 8% + 2.0 x (12% – 8%) = 12%.

Now we can calculate SGP’s value using the formula: Value of Firm = Present Value of Expected Future Cash Flows/(1+Cost Of Equity)^Number Of Years.

Assuming that future cash flows are known and remain constant as well as disregarding any taxes due to the post-merger 34% rate, then SGP’s would have a current value equal to it expected future cash flows discounted for time and risk at a rate of 12%. Brau would have to pay this amount in order for SGPs.