1. You are trying to estimate the value of synergy in a merger. The two firms involved, Novotel and VideoGraf, have the following characteristics: Novotel VideoGraf EBIT $ 160 million $ 450 million BV of Capital (Beginning) $ 1,000 million $ 2,400 million Beta 0.8 0.8 Debt to Capital Ratio 10% 10% Cost of debt (pre-tax) 8% 8% Neither firm has any working capital requirements, and they are both in stable growth, growing at 5% a year in perpetuity. The tax rate for both firms is 40%, and the treasury bond rate is 5% (The market risk premium is 6.3%) a. Estimate the value of the combined firm, assuming no synergy. ( 3 points) b. Now assume that when the merger occurs, the combined firm will be able to reduce its capital base (book value) by 20%, while leaving operating income intact. In addition, it plans to tap into the extra debt capacity that it will have to raise its debt to capital ratio to 25%, while keeping its cost of debt unchanged. Estimate the value of synergy in this merger. (You can assume that the firm will still be in stable growth at 5%).( 4 points)