Ebit*(1-T) net capex* + NWC spending 1 7,600.00 3,000.00 2 8,132.00 3,210.00 3 8,701.24 3,434.70 3. Company A has agreed to merge with Company B. The projected cash flows, debt structures, and growth rates for cash flows of the individual (standalone) firms are as follows: Company A Year Company B Year margin 0.253183 Ebit*(1-T) net capex + NWC spending 1 1,800.00 900.00 2 1,962.00 981.00 3 2,138.58 1,069.29 4 9,310.33 3,675.13 4 2,331.05 1,165.53 5 9,962.05 3,932.39 Terminal Year D/V (assumed to remain constant) equity beta debt beta Rd T expected growth during projection period 0.07 expected growth after year 5 0.03 10,260.91 4,050.36 Terminal Year 5 2,540.85 1,270.42 2,617.07 1,308.54 0.1 0.8 D/V (assumed to remain constant) equity beta 0.1 0.9 0 debt beta 0 0.05 Rd 0.05 0.35 T 0.35 expected growth during projection period expected growth after year 5 0.09 0.03 You can also assume: Rf risk premium * net capex is capex in excess of depreciation a. What is the value of each firm on a standalone basis? 0.0425 0.04 Rf risk premium 0.0425 0.04 Now assume that the combined firm will have some economies of scale, allowing it to increase its current after tax operating margin. The annual dollar savings will be approximately $400 million, increasing the combined firm's pre-tax operating income by that amount. The expected growth rate of the combined firm over the next 5 years will be 8.5%; but because of the reduction in competition from the merger of these firms, the combined firm will continue to grow at that rate over the next 6 years, before falling to the prior long term growth rate. b. What is the cost of capital of the combined firm? c. What is the value of the combined firm?