1. (Cash for Stock Merger) The following cash flow estimates have been collected for the acquisition candidate for the proposed merger (in millions):

Year 12345__

Cash flows now for the target 6080100125150

Additional cash flows (synergy)4070100125150

Total cash flows from target (after merger)100150200250300

Risk free rate of return 4%

Beta for this project (the company after merging)1.07

Market risk premium 5%

Pre-tax cost of debt8%

Marginal after tax rate20%

Number of shares outstanding for the target company (millions)14

Current market price per share for the target company$51

Percentage of the acquisition financed with debt 34%

Percentage of the acquisition financed with common equity66%

What is the after tax cost of debt for this merger ?

What is the after tax cost of common equity for this merger ?

What is the weighted average cost of capital for this acquisition candidate ?

Please run a net present value using the WACC calculated above with the total cash flows from the target (given above) to determine the maximum price per share you are willing to pay for this target candidate?

Based on the above calculations, and the current market price, should this candidate be pursued?