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Marston Marble Corporation is consideraing a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its curent beta is 1.
Marston Marble Corporation is consideraing a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its curent beta is 1.30. Conroy has been barely profitable, so it has paid an average of only 20 percent in taxes during the last several years. In addition, it uses little debt, having a target debt ratio of just 25 percent, with the cost of debt 9 percent. If the acquisition were made, Marston would operate Conroy as a separate wholly owned subsidiary. Marston would pay taxes on a consolidated basis, and the tax rate would therefore increase to 35 percent. Marston would also increase the debt capitalization in the Conroy subsidiary to 40 percent of assets, and pay 9.5 percent on the debt. Marston's acquisition department estimates that Conroy, if acquired, would generate the following free cash flows and interest expenses (in millions of dollars):Year
