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Question 1:Astral Telecom and Bright Wiring will merge. Astral has a total market value (VA) of $275M (M = million), and Bright has a total market value (VB) of $240M. Their merger will lead to operating efficiencies and will produce a synergistic effect of $15M.i) Ignore expenses and the payment of a premium. What is the total market value of the merged firms?ii) Ignore the payment of a premium. If the merger would entail expenses (E) amounting to $5M, is there a net advantage to merging (NAM)?iii) If Astral buys Bright’s outstanding shares, paying Bright’s common stockholders a $14M premium, will the acquisition be advantageous to Astral’s shareholders?iv) Given answer in (ii), what would Bright’s shareholders have received as a premium if the synergistic effects minus expenses had been shared equally?v) Given answer in (ii), what will it take for there not to be a net advantage of merging?vi) Who, if anyone, gains and loses in this merger? To what can any gains or losses be attributed to (percentage)?Question 2:Nursya Industries has no debt and expects to generate free cash flows of $43 million each year. Nursya believes that if it permanently increases its level of debt to $100 million, the risk of financial distress may cause it to lose some customers and receive less favourable terms from its suppliers. As a result, Nursya’s expected free cash flows with debt will be only $46 million per year. Suppose Nursya’s tax rate is 35%, the risk-free rate is 5%, the expected return of the market is 12%, and the beta of Nursya’s free cash flows is 1.10 (with or without leverage). Calculate the value of Nursya without leverage (Vu) and with leverage (Vl).
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