Question
BigCo is buying LittleCo, using shares. BigCo's cost of capital is 13.2%, and LittleCo's cost of capital is 18.5%. Both firms are all equity. If
BigCo is buying LittleCo, using shares. BigCo's cost of capital is 13.2%, and LittleCo's cost of capital is 18.5%. Both firms are all equity. If the merger goes through, BigCo will give LittleCo access to foreign markets, increasing its EBIT by $51,209 per year in perpetuity. The tax rate is 34%. BigCo has a share price of $21, with 255,596 shares outstanding. LittleCo has a share price of $18, with 58,812 shares outstanding. What is the largest number of shares in the merged firm that BigCo could justify giving LittleCo's shareholders in exchange for all of their holdings in LittleCo? Please give your answer to the nearest share.
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