Question 3 a) Firms A and B are competitors with very similar assets and business risks. Both are all-equity firms with aftertax cash flows of $10 per year forever. Both have an overall cost of capital of 10%. Firm A is thinking of buying Firm B. The aftertax cash flow from the merged firm would be $21 per year. Does the merger create synergy? What is * VB ? What is V? (5 marks) b) The shareholders of Jolie Company have decided in favour of a buyout from Pitt Corporation. Information about each firm is given below: Jolie Pitt P/E Ratio 10.4 22 Shares Outstanding 92,337 194,000 Earnings $245,000 $730,000 Jolies shareholders will receive one share of Pitt stock for every three shares they hold in Jolie. What will be the EPS of Pitt after merger? What will the P/E ratio be if the NPV of acquisition is zero? (5 marks) c) Write Short notes on the following: (5 marks each) i) MM Propositions in the presence of corporate taxes and no bankruptcy costs ii) Key dates in cash dividend payment iii) Margin requirements in Futures trading