=+The cost of equity capital for both firms is 12 per cent. B is expected to produce a growth in dividends of 5 per cent per annum to infinity with its current strategy and management. However if A acquired B and applied superior management and gained benefits from economies of scale the growth rate would rise to 8 per cent on the same capital base. The transaction costs of the merger would amount to £400,000.

Required a

What value could be created from a merger?