40 points.

BigCo is buying LittleCo. Before the merger, BigCo had a yearly EBIT of $3M and a cost of equity of 12%. Before the merger, LittleCo had a yearly EBIT of $1M and a cost of equity of17%. After the merger, the combined firm will have an EBIT of $6M. The tax rate is 35%, and the merger will require BigCo to increase their net working capital by $500,000. BigCo currently has 2M shares outstanding, and LittleCo currently has 700,000 shares outstanding.

a.What is the PV of the synergies of this merger?(10 points)

b.What price should BigCo offer to pay if they are willing to give LittleCo shareholders 40%of the synergies?(10 points)