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Tom Corporation is considering the acquisition of Jerry Corporation. Jerry Corporation has free cash flows to debt and equity holders of $4,150,000. If Tom Corporations

Tom Corporation is considering the acquisition of Jerry Corporation. Jerry Corporation has free cash flows to debt and equity holders of $4,150,000. If Tom Corporations acquires Jerry Corporation, Jerry will reduce operating costs by $1,000,000. This will increase free cash flow to $5,000,000. Assume that cash flows occur at year-end and the weighted average cost of capital is 7%.

a. What is the value of Jerry Corporation without a merger?

b. What is the value of Jerry Corporation with the merger?

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