BigCo is buying LittleCo. They are paying 70% in cash, 30% in equity. The tax rate is 40%.

a- LittleCo has a levered cost of equity of 19%. They bring in $300,000 in EBIT per year and pay $75,000 per year in interest. Five years from now, they will receive a one-time payment of $900,000. What is the value of their equity?

b- BigCo currently produces $850,000 per year in net income and has a levered cost of equity of 16%. After the merger, BigCo will gain access to LittleCo’s risk management expertise and the appropriate discount rate for these cash flows will drop to 13%. What is the PV of this synergy?

c- If BigCo promises LittleCo’s shareholders one third of the synergies and BigCo currently has 10,000 shares outstanding, how many shares should LittleCo’s shareholders receive as part of their payment?