Lava Lamps Inc. had \($800\) million in earnings before interest and taxes last year. It has just acquired a 50% stake in General Lamps Inc., which had \($400\) million in earnings before interest and taxes last year.

Because Lava Lamps has a majority active stake, it has been asked to consolidate last year’s income statements for the two firms.

a. What earnings before interest and taxes would you see in the consolidated statement?

b. If both firms have a 5% stable growth rate, a 10% cost of capital, a 40% tax rate, and a return on capital of 11%, estimate the value of equity in Lava Lamps.

c. How would your answer change if you were told that General Lamps has a 9% cost of capital and a 15% return on capital?