Company A is interested in acquiring company B. Company B has 2 million shares outstanding and a target capital structure consisting of 40% debt. Company Bs debt interest rate is 9%. Assume that the risk-free rate of interest is 3.5% and the market risk premium is 8%. Both companies face a 40% tax rate.

Company Bs free cash flow is $3 million per year and is expected to grow at a constant rate of 4% a year; its beta is 1.52. Company B has $16.52 million in debt.

Company A estimates that if it acquires company B, Synergies will cause the free cash flows to be $3.5 million, $3.9 million, $4.5 million, and $4.67 million in years 1 through 4, respectively, after which the free cash flows will grow at a 4% rate. Assume that company B will have $21.61 million in debt. Also, assume after the acquisition, the target capital structure is maintained.

1-What is the current total value of company Bs stock?

2-What is the unlevered value of company B to company A?

3-On the basis of your answers in 1 and 2 indicate the range of possible prices that company A could bid for each share of Company B's common stock acquisition.

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