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.

LittleCo$$s cost of equity is $18\%.$ This merger will allow for a project with an initial cost of $$5$M

and EBIT of $$1\mathrm{.}5$M for $8$ years, growing at $4\%$ per year.

a$.$ What is the net present value of the synergies from this merger? $(15$ points$)$

b$.$ BigCo is paying entirely in shares and is offering LittleCo$$s shareholders $30\%$ of the

synergies of the merger. How many shares should BigCo issue to compensate LittleCo$$s

shareholders? $(15$ points$)$

c$.$ What are two conclusions you could reasonably draw from the fact that BigCo is paying

with shares? $(10$ points$)$