Valuation of a Merger You Own Stock in Carpet City $\ge$

Valuation of a Merger You own stock in Carpet City, Inc., which has just made a bid of $165 million to purchase Tile Corporation. The two firms currently have cumulative total cash flows of $25 million which are growing at 2 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase by an additional 4 percent for the first three years following the merger. After the first three years cash flows will grow at a rate of 3 percent. The merged firms are expected to have a beta = 1.75, the risk-free rate is 5.5 percent, and the market risk premium is currently 7.5 percent. Calculate the NPV of the merger. Will you vote in favor of the merger?

A) yes, the NPV is $\ge$ $0
B) yes, the NPV is $\le$ $0
C) no, the NPV is $\ge$ $0
D) no, the NPV is $\le$ $0