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A regional restaurant chain, TKO Cafe is considering purchasing a smaller chain, Bob sandwiches which is currently financed usng 20% debt at a cost fo 8%. TKO cafe's analysts project that the merger will result in incremental free cash flows and interest tax savings of 2million in year 1, 4 million in year 2, 5 million in year 3 and 117 million in year 4. (The year 4 cash flow includes a horizon value of 107 million.) the acquisition would be made immediately, if it is to be undertaken. Sally'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 appropriate rate for use in discounting the free cash flows and the interest tax savings?

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