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T-Mobile has a current market value of $35 million and is considering the acquisition of Sprint, whose current market value is $20 million. Both firms are all-equity. A market research study by the investment bank hired by T-Mobile shows that a purchase of Sprint will increase the after-tax cash flows of Sprint by $600,000 in perpetuity. The appropriate discount rate for the incremental cash flow is 8%. a) What is the value of Sprint to T-Mobile? b) T-Mobile is trying to decide whether to offer 25% of its own stocks or $21 million cash to shareholders of Sprint. If you were a shareholder of T-Mobile, which method of payment would you prefer for the acquisition of Sprint and why? Part B On January 10, 2000 AOL announced the acquisition of Time Warner (TWX), in which 1.5 shares anged for 1 share of TWX. The table below describes the pre-merger values: AOL TWX Share Price $72.88 $64.75 Number of Shares 2.6 Billion 1.4 Billion Market Capitalization (pre-merger) $189.50 Billion $90.70 Billion a) What percentage of the merged company (AOLTWX) was held by existing shareholders of AOL and TWX after the transaction, respectively? b) Name at least two reasons AOL might want to acquire Time Warner? c) Assume that there are no synergies between the two firms. What was the premium (in %) that TWX shareholders received? How much would AOL have to pay for TWX in cash such that shareholders of TWX would be indifferent between a share or cash acquisition