Handout Problem 2 Cavuto Inc. is a private company, in the software business. The owner, who has her entire wealth invested in the business, has come to you for some advice on a proposed acquisition of Soros Inc, a private retail business, also owned by an undiversified individual. You have collected the following information on the two companies: Cavuto reported after-tax operating income of $ 10 million last year on a book value of capital of $ 50 million. The firm is in stable growth, growing 4% a year in perpetuity. Soros reported after-tax operating income of $ 5 million last year on a book value of capital of $ 40 million. The firm is in stable growth as well, growing 4% a year in perpetuity. Both firms are entirely equity funded. You have collected the following information on publicly traded firms in the software and the retail businesses: Business Unlevered Beta Correlation with the market Software 1.20 30% Retail 0.90 40% The tax rate is 40%. The riskfree rate is 5% and the market risk premium is 4%. a. Estimate the value of Cavuto as a stand-alone firm. b. Estimate the value of Soros Inc. as a stand alone firm. c. Estimate the value of synergy in the acquisition. The combined firms equity will have a correlation of 50% with the market and you can assume that there are no operating synergies in this merger.