Circle is considering acquiring Square. Square's expected net cash flows for the first 4 years

of the post-merger period are $500,000 in year 1, $600,000 in year 2, $700,000 in year 3,

and $800,000 in year 4. After 4 years, the net cash flows are expected to grow at a constant

rate of 5% per year forever. Circle believes the appropriate cost of capital to discount these

cash flows is 12%. Square has $3 million in debt and 600,000 shares outstanding each priced

at $7.87 in the market.

a)

What is Square's terminal value?

b)

What is Square's firm value to Circle?

c)

What is Square's equity value to Circle?

d)

What is the value of Square's stock price to Circle?

e)

Determine the merge premium if the offer price is $9.25.