1.Your firm is considering a merger with Cookie Corp.Cookie has 3,000,000 shares outstanding and a target capital structure of 25% debt.Cookie's debt interest rate is 8% on $50M in debt.The risk-free interest rate is your T-bond rate and the market risk premium is 6%.Both firms are in the same tax bracket.Cookie's (levered) equity beta is 1.50.The current value of Cookie's stock is $50 per share.You estimate synergies will produce the additional income given below.After year 3, the tax shields and free cash flows will grow by 3% and the combined firm will maintain the 25% debt ratio.

a.Use the adjusted present value (APV) to find the per share value of Cookie to your firm.Use the WACC to get the horizon value (HV).Use M&M no tax relationship to get the unlevered cost of capital.

INCOME STATEMENT

Y1

Y2

Y3

EBIT

19,000,000

25,000,000

27,000,000

Interest Expense

4,000,000

4,000,000

4,000,000

EBT

15,000,000

21,000,000

23,000,000

Taxes

Net Income

Net Investment in Operating Capital

2,300,000

2,500,000

2,700,000

b.The CEO of Cookie Corp, Bella Donna, is concerned about the synergies.She heard that they are very difficult to realize.Is she more likely to want a stock offer or a cash offer? Explain.