(12 pts) 4. Firm A (the acquiring firm) is in the similar business as Firm T (the acquired or target firm) and is considering acquiring Firm T. Firm A expects to generate annual before-tax cost savings from the acquisition of $80 million by the end of year 5. The cost savings benefit would be $20 million in year 2, increase by $20 million per year until it reaches $80 million in year 5, and remain at $80 million thereafter. Firm A also expects that, following the merger, it would incur before-tax costs associated with integrating the two companies for a total of $140 million over the first two years (ie., $70 million for each year). Below is the information for Firm T. Year is the year of valuation. Firm T (5 millions) Year 1E 2E 4E SE GE Pre-tax sales $1.500 Pre-tax operating income Pre-tax cost savings Pre-tax cost of integrating businesses Depreciation expense Capital expenditures $1.620 162.0 0.0 70.0 100.0 150.0 S1,750 175.0 20.0 70.0 $1,890 189.0 40.0 0.0 110.0 170.0 S2,041 204.1 60.0 00 115.0 180.0 $2.204 220.4 80.0 0.0 120.0 190.0 S2 314 231.4 80.0 0.0 105.0 0.0 160.0 78.4 Firm T's annual net working capital is 12 percent of sales for the year. Tax rate is 25%. The firm's pre-tax cost of debt is 7 percent per year. The annual risk free rate of return is 5 percent and the annual market rate of return is 11 percent. The company has a debt to equity ratio of 0.40 and a levered equity beta of 1.5. Assume that free cash flows grow at a constant annual growth rate of 5% forever after year 6. Find the value of the firm with synergies based on the free cash flow valuation model. Notes: Sales estimated using 8% growth through year 5 and 5% growth beyond year 5. Pre-tax operating income estimated as 10% of sales. The pre-tax operating income is the carnings before interest and taxes (EBIT) defined as Sales Fixed costs Variable costs Depreciation expense