Reed Inc. a real estate development and consulting company with approximately $2 billion in sales is based in Jacksonville, FLA. The company specializes in property sales and marketing and receives over 5,000 unique visitors daily on its website. Due to weakening demand in the real estate market in Florida in recent years, Reeds executive management team believes that the company can achieve a more rapid growth by making the right acquisitions.

Legal Services Inc. Firm is a legal service consultancy company. The company has a great reputation in the legal community in FLA. Reed wants to keep the Legal Services brand name and operations in an acquisition.

After many discussions and following Baileys estimate of approximately $1,200 million of cost reduction synergies from the merger, Reed decides to proceed with a takeover offer for Legal Services Inc. Baileys supervisor asks him to evaluate the deal based on a stock offer in which Reed exchanges 0.80 shares of Reed stock for each share of Legal Services stock. Bailey gathers the following data for his analysis:

	Reed	Legal Services
Pre merger stock price	45	20
Number of shares Outstanding (million)	100	70
Pre-Merger market value(Million)	4,500	1,40

Legal Services has no outstanding long-term debt or preferred stock. Bailey estimates that Legal Services cash flows at the end of next three years will be $40 million, $60 million, and $70 million, respectively. After year 3, he projects that free cash flow will grow at 4 percent per year indefinitely. He also estimates that the appropriate discount rate for this cash flow stream is 12 percent per year.

2. Based on Baileys analysis and estimates of cost reduction synergies, the gains to Legal Services shareholders and Reeds shareholders as a result of merger are closest to: A.Gain to Legal Services shldrs: $1,120.00; Gain to Reeds shldrs: ($80.00) B.Gain to Legal Services shldrs: $1,960.00; Gain to Reeds shldrs: $760.00 C.Gain to Legal Services shldrs: $1,148.56; Gain to Reeds shldrs: $51.44

3. Given different forecasts of the estimated synergies resulting from the merger between Reed and Legal Services, what payment method is each firm likely to prefer in this deal? A.Reed preferred method: Cash; Legal Services preferred method: Cash B.Reed preferred method: Stock Legal Services preferred method: Stock C.Reed preferred method: Cash Legal Services preferred method: Stock