14.TDC Inc. is interested in acquiring PMG Inc. Both companies are publicly-traded companies. You have collected the following information on the two firms:

-TDC reported after-tax operating income of $80 million in the most recent financial year. Its book value of capital is $600 million and it expects to maintain a growth rate of 3% a year in perpetuity.

- PMG Inc reported after-tax operating income of $40 million in the most recent year. Its book value of capital is $400 million and it expects to maintain a growth rate of 3% a year in perpetuity.

Both firms are all equity funded (no debt). TDC's beta is 1, PMG's beta is aslo 1.The riskfree rate is 3% and the market risk premium is 5%.

If TDC acquires PMG, it believes that the combined firm will be able to reduce its capital base (book value of capital) by 20%, while leaving operating income intact. Estimate the value of combined company in this merger. (You can assume that the combined firm will still be in stable growth at 3%)

Select one:

a. $2,472 million

b. $1,920 million

c. $1,854 million

d. $1,977.6 million

e. $1,800 million

16.ABC Company generated after-tax operating income of $ 8 million on revenues of $100 million in the most recent year. Its book value of capital in the most recent year was $ 20 million. If you expect that after-tax operating income will grow 10% a year for the next 3 years and that the firm will maintain its current return on capital, estimate the expected cash flows each year for the next 3 years.

Select one:

a.Year 1

Year 2

Year 3

FCF

6.6

7.26

7.986

b.Year 1

Year 2

Year 3

FCF

6

6.6

7.26

c.Year 1

Year 2

Year 3

FCF

8

8.8

9.68

d.Year 1

Year 2

Year 3

FCF

4

4.4

5.84

e.Year 1

Year 2

Year 3

FCF

4.4

5.84

5.324

f. Year 1

Year 2

Year 3

FCF

8.8

9.68

10.648