Merger Analysis Marston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its beta is 1.25. Conroy has been barely profitable, so it has paid an average of only 15% in taxes during the last several years. In addition, it uses little debt; its target ratio is just 30%, with the cost of debt 8%. 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%. Marston also would increase the debt capitalization in the Conroy subsidiary to wd = 40%, for a total of $18.15 million in debt by the end of Year 4, and pay 10.0% 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) in Years 1-5: Year Free Cash Flows Interest Expense 1 $1.30 $1.2 2 1.50 1.7 3 1.75 2.8 4 2.00 2.1 5 2.12 ? In Year 5, Conroy's interest expense would be based on its beginning-of-year (that is, the end-of-Year-4) debt, and in subsequent years both interest expense and free cash flows are projected to grow at a rate of 8%. These cash flows include all acquisition effects. Marston's cost of equity is 13.6%, its beta is 1.2, and its cost of debt is 8.5%. The risk-free rate is 7%, and the market risk premium is 5.5%. Use the compressed APV model to answer the following questions.

A) What is the dollar value of Conroy's operations? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.

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B) If Conroy has $12 million in debt outstanding, how much would Marston be willing to pay for Conroy? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate calculations.

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