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%.

a) What is SellCos weighted average cost of capital?

b) What is the NPV of the synergies of this merger?

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

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