Question 5 (15 points) Currently Berlusca.com has $150m of assets-in-place, an additional $100m of cash and a growth opportunity (a project) that requires an investment of $100m and that will generate $200m in cash flow next year (and nothing thereafter). The investment has to be financed with cash. Assume that the assetsin-place can be sold for $150m one year from now. An alternative to taking the project is to acquire TV.COM for $500m. The sellers require that 20% of the acquisition price is financed with cash and the rest with shares of Berlusca.com. Suppose discount rates are zero and that Berlusca.com is all equity financed and has 10m shares outstanding. The stock price today is $50 per share. Because Berlusca.com is a very secretive company, it doeVnW annoXnce iWV inYeVWmenW oU oWheU deciVionV (e[cepW Whe acTXiViWion, and eYeryone agrees $500m is the fair value of TV.COM) until it has to, i.e. one year from now when it has to file its annual report. If the management wants to maximize the long-term interest of its existing shareholders (i.e., in this example, maximize shareholder value at t = 1), what should the company do?

a) Invest in the project?

b) Acquire TV.COM?

c) Repurchase 2m shares at $50 in the open market?

Please show your calculations and discuss your findings briefly.