You have been just hired as CEO of Bitter Inc., a conglomerate that operates in three businesses. The details of the businesses are provided below:

	Entertainment	Movie Theaters	Travel Services	Company
Revenues	$450	$400	$325	$1,175
Operating Income (next year)	$200	$85	$95	$380
Effective tax rate	36%	20%	36%	32.42%
After-tax Operating Income (next year)	$128	$68	$61	$257
Invested Capital	$525	$375	$125	$1,025
Expected Growth Rate	3.50%	3.50%	3.50%	3.50%
Cost of capital	11.00%	9.25%	8.00%	10.25%

a. What is the value of the consolidated company, using the combined companys cash flows and cost of capital?

b. What is the value of Bitter as the sum of its parts, using the divisional cash flows and the industry average cost of capital for each division?

c. If you are getting a different value for Bitter in part b, where is the difference coming from?

1. A conglomerate discount is being applied by the market.
2. The broken-up businesses will be run more efficiently as stand-alone units.
3. The combined company has a less optimized capital structure than that the individual units could have.
4. The broken-up businesses will pay less in taxes than the combined company.
5. The broken-up businesses will have higher growth than the combined company.
6. All of the above.