BigCo is buying LittleCo, BigCo has a share price of $40 and 600,000 shares outstanding. LittleCo has a share price of $28 and 300,000 shares outstanding. All firms are 100% equity financed. LittleCos cost of equity is 18%. This merger will allow for a project with an initial cost of $5M and EBIT of $1.5M for 8 years, growing at 4% per year. The corporate tax rate is 22%.

a) What is the net present value of the synergies from this merger?

b) BigCo is paying entirely in shares and is offering LittleCos shareholders 30% of the synergies of the merger. How many shares should BigCo issue to compensate LittleCos shareholders?

c) What are two conclusions you could reasonably draw from the fact that BigCo is paying with shares?