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American Pizza, a national pizza chain, is considering purchasing a smaller chain, Eastern Pizza.

American Pizza, a national pizza chain, is considering purchasing a smaller chain, Eastern Pizza.  American's analysts project that the merger will result in incremental net cash flows of $2 million in Year 1, $4 milllion in Year 2, $5 million in Year 3, and $117 million in Year 4.  (The Year 4 cashflow includes a terminal value of $107 million.)  The acquisition would be made immediately, if it is undertaken.  Eastern's post-merger beta is estimated to be 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 discount rate for valuing the acquisition?
a. 17%
b. 16%
c. 15%
d. 14%
e. 12%

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