Nero's Pasta Case Study

Background
In the 1970s, several large US food processing companies like General Mills and Pillsbury decided to expand into restaurant business. The reason was that an alarming number of consumers were eating out rather than at home more often due to rising family incomes and increase of women in the workforce. National Mills, another food processing company, set up a subsidiary International Concepts Incorporated (ICI) in the year 1983. ICI was doing reasonably well and National Mills also encouraged expansion and offered to supply additional capital. Bob Ratliff, ICI’s President along with his management team decided to embark on acquisition program in order to expand and wants to analyze if the acquisition of Nero’s Pasta, a chain of eight restaurants that operate in the Chicago area, add Economic Value to ICI.
Rationale for Merger
Tax Considerations: When two companies enter into a merger taxes can be

Also, the synergistic effects tend to be more beneficial for the acquired company in the short run and benefit the acquiring company more in the long run.
Sensitivity Analysis
The variable cost is given as 85% of the net sales. Now if the variable cost is greater than 85% then the maximum price will decrease and in turn the cash flows will also decrease. And if the variable cost is lesser than 85% then the maximum price will increase and in turn the cash flows will also increase.
The managers will be interested in the sensitivity analysis to determine the effects of variable costs on the maximum price of the share. In this case, if the share price is $3 per share, the NPV of Nero’s Pasta should be 3 * 5,000,000 = $15,000,000. The variable costs will be more than 85% of the net sales.
Return on Equity
From the Cash Flow Statement we can see that, ROE projected for the following years are
1996 - 42%; 1997 - 45%; 1998 - 48.13%; 1999 -