BuyCo is buying SellCo using a mix of cash and shares. They will be paying $3M in cash, and the remainder in equity in the merged firm. BuyCo currently has a market value of $85M, and SellCo has a market value of $11M. Purchasing SellCo will allow BuyCo to do a project with no upfront costs that will produce an EBIT of $700,000 each year for the foreseeable future, and will also produce a single lump sum cash flow of $2.5M ten years from today. The tax rate is 32% and the riskless rate is 2%. SellCo is 60% debt financed and 40% equity financed, has an unlevered cost of equity of 8% and a cost of debt of 5%. BuyCo has 100,000 shares outstanding.

a) 10 points: What is SellCos weighted average cost of capital?

b) 10 points: What is the NPV of the synergies of this merger?

c) 5 points What price should BuyCo pay for SellCo if they are willing to offer SellCos shareholders half of the synergies?

d) 10 points: How many shares should BuyCo offer SellCos shareholders in payment, taking into account the $3M in cash they are paying?