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Question 1: A Corp. has decided to acquire T Corp. A Corp. has 50 million shares outstanding, each trading at $40 per share before the

Question 1: A Corp. has decided to acquire T Corp. A Corp. has 50 million shares outstanding, each trading at $40 per share before the surprise acquisition announcement. T Corp. has 25 million shares outstanding, each trading at $30 per share before the acquisition announcement. The acquisition will result in cost savings of $14 million per year forever. The discount rate for cost savings is 10%. The acquisition will also involve transaction costs of $10 million. The announcement said that A will buy T in a stock swap transaction at a premium of 5% based on pre-merger prices. What will be the share prices of the two firms immediately after the announcement?

Please provide detailed explanation of your each steps.

Question 2:

An all-equity firm is deciding how much cash to invest in business and how much to return to shareholders (through dividends or share repurchase). The following table shows how different investment levels will perform. The first column shows possible investment levels and the second column shows the cash flow generated from each investment level after one year (M stands for $millions). All the cash generated from investments will be returned to shareholders. Assume investment can only be made in multiples of millions. Shareholders will earn a return of 12% over next year on cash that they get today from dividends. There are no taxes. The firm has cash of $10 million. How much of this cash should be invested in the firm and how much should be returned to the shareholders?

Investment

1M

2M

3M

4M

5M

6M

7M

8M

9M

10M

Cash Flow

2.137M

3.618M

4.973M

6.154M

7.305M

8.429M

9.513M

10.577M

11.581M

12.565M

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