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). TDCs beta is 1, PMGs 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