Comfy Home Care Inc. is considering a merger with Mega Home Care Inc. Mega is a publicly traded company, and its current beta is 1.25. Mega has been barely protable and had paid an average of 25% in taxes during the last several years. In addition, it uses little debt, having a debt ratio of just 30%. If the acquisition were made, Comfy would operate Mega as a separate, wholly owned subsidiary. Comfy would pay taxes on a consolidated basis, and the tax rate would therefore increase to 30%. Comfy also would increase the debt capitalization in the Mega subsidiary to 35% of assets, which would increase its beta to 1.60. Comfy estimates that Mega, if acquired, would produce the following net cash ows to Columbia's shareholders (in millions of dollars): Year Free Cash Flows to Egu'yholders $1.25 1 2 $1.40 3 $1.70 4 $1.90 5 and beyond Constant growth at 5% These cash flows include all acquisition effects. Comfy's cost of equity is 12%, its beta is 1.0, and its cost of debt is 8%. The risk-free rate is 5%. a. What discount rate should be used to discount the estimated cash ow? (Hint: Use Comfy's cost of equity to determine the market risk premium.) b. What is the dollar value of Mega to Comfy's shareholders