Handout Problem 4 - The Value of Synergy: Tax Savings You are trying to value synergy in a merger of Silverado Stores, a discount retail firm, and Zale Distributors, a jewelry retailer. The primary motivation for the merger is cost savings for the combined firm, and these savings are expected to amount to $ 10 million (pre-tax) next year (the first year after the merger) and grow 5% a year in perpetuity. Silverado has a beta of 1.20, market value of equity of $ 100 million and a market value of debt of $ 80 million. Zale has a beta of 1.30, a market value of equity of $ 150 million and a market value of debt of $ 50 million. Both firms have a pretax cost of debt of 7% and the tax rate is 30%; the firms plan no new debt issues after the merger. The riskfree rate is 5% and the market risk premium is 4%. a. Estimate the cost of capital for the combined firm b. Estimate the value of the synergy