Firm B (Bidder) is considering a merger with Firm T (Target). The CFO in firm B has prepared the following pro forma Income statement for the target firm assuming the merger takes place. The following income statement includes all synergistic benefits from the merger. If firm B buys firms T, an immediate dividend of $55 million would be paid from the target firm to the bidder firm. Stock in Firm B currently sells for $87 per share, and the company has 18 million shares outstanding. Firm T has 8 million shares outstanding. Both firms can borrow at an 8% interest rate. The CFO in firm B believes the current cost of capital for the bidding firm is 11%. The cost of capital for the target firm is 12.4%, and the cost of equity is 16.9%. In five years, the value of target firm is expected to be $235 million. You are asked to analyze the financial aspects of the potential merger and provide answers for the following questions. Question 1: Suppose shareholders of the target firm agree to a merger price of $23. Should the bidding firm proceed with the merger? Discount rate for dividends Discount rate for Terminal Value of Target firm Pro Forma Income Statement Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 24885000 27255000 31995000 33180000 41475000 0 16000000 19000000 21000000 25000000 235000000 Net Income Additions to retained earnings Dividends from Target (= Net income - Additions to retained earnings) Terminal value of Target firm Cash amount paid to Target firm in year 0 = merger price * #shares in Target firm) Dividends received By bidder from Target in year 0 Cash flow in Year 0 =Cash amount paid - Dividends from Target in year 0) Present value of Cash flow Each Year (=Dividend (or Terminal Value) in year t/(1+discount rate)^t) NPV of the Merger (=sum of all the present values of cash flows) Based on the NPV, should the Bidder firm proceed with the merger (yes or no)