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# A. Given are the following data for year 1:

Revenue = \$45 million; Variable cost = \$10 million; Fixed cost = \$5 million; Depreciation = \$1 million; Interest expense = \$3 million; capital Investment = \$12 million; change in working capital = \$2 million. Corporate tax rate is 30%. Calculate the free cash flow to firm (FCFF) for year 1:

B. Firm A has a value of \$500 million and Firm B has a value of \$300 million. Firm A has 1000 shares outstanding, and Firm B has 1000 shares outstanding. Suppose that the merger would increase cash flows of the combined firm by \$5 million in perpetuity. Assuming the cost of capital for the new firm is 10%.

If Firm A purchases Firm B for \$330 million, how much do Firm B's shareholders gain from this merger?

c. Alpha Corporation has earnings before interest and tax (EBIT) per annum in perpetuity of \$28,714. The tax rate is 30%. The firm is funded \$50,000 of debt and \$100,000 of equity. The cost of equity is 18% and the cost of debt is 6%.

Given the information above, what is the appropriate discount rate if earnings before interest and tax (EBIT) are used to calculate the value of the firm?

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