You have been asked to estimate the value of synergy in the merger of DirectCom, a movie

streaming firm, and Movie Magic, an entertainment company and have been provided with

the following information on the two companies:

Both firms are in stable growth, growing $3\mathrm{.}20\%$ a year in perpetuity. The reinvestment rate is the

amount of After$-$tax operating income that will be used for Capital Expenditures less depreciation plus

and increases in Net Working Capital. $($Hint: you will need to consider this percentage to arrive at FCF$)$

a$.$ Estimate the value per share of DirectCom, prior to the merger. $(1$ point$)$

b$.$ Estimate the value per share of Movie Magic, prior to the merger. $(1$ point$)$

c$.$ Now assume that combining the two firms will be able to cut annual operating

expenses by $$13$ million $($on an after$-$tax basis$),$ though it will take three years for these

costs savings to show up$.$ Estimate the value of synergy in this merger. Assume that the cost of capital

for the combined firm is $8\mathrm{.}75\%.$ Don't overcomplicate it$.$ Value the cost savings on its own. $(3$ points$)$